Foreign assets of private residents may be taxed: LHC

In a landmark judgment, the Lahore High Court (LHC) said that the tax can be legally levied on foreign assets of private residents under Section 8(2)(b) of the Finance Act, 2022.

The LHC has issued a detailed decision on this. According to the order, Section 8(2)(b) of the Finance Act, 2022 is valid, constitutional and intrinsic. No error is found in the exercise of legislative powers by Parliament under entry 50 of the Federal Legislative List, the matter being within the competence of Parliament in terms of Article 142(a) of the Constitution of Pakistan. For the reasons set forth in the preceding paragraphs, all said petitions are dismissed as without merit.

Petitioner’s arguments that taxes could not be imposed on foreign assets declared under amnesty programs offered by the federal government are self-defeating.

The LHC order stated that “the nature, object and basis of the tax on the capital value of assets is the resident natural person, therefore, otherwise there is no question of conflict of laws. The tax on the capital value of the assets cannot be interpreted as a municipal tax, which otherwise applies to foreign real estate.’

The petitioners challenged the constitutionality of section 8(2)(b) of the Finance Act 2022 on two grounds. First, that the enacted law, which was alleged to have taxed the foreign property of the petitioners, was not within the territorial competence of Parliament; and second, the absence of legislative competence, because the matter of taxation of immovable property was exclusively within the legislative jurisdiction of the provincial legislature(s). Parliament has no power to tax assets located outside the territorial limits of Pakistan, which are defined in Articles 1(2) and 141 of the Constitution.

The LHC order said that the tax is levied on the value of assets, which assets were recognized as foreign assets of a resident. The application of the rule of substance and substance’ that a tax is manifestly levied is ‘in relation to the capital value of the assets’, which cannot be equated to a levy on a body of immovable property.

There is no ambiguity in the words/phrases used in entry 50. Entry 50, read separately, consists of two distinct parts, each of which describes/covers a separate and distinct class/category of taxes. the first half of entry 50 provided for the principle of taxation on the capital value of assets and the second half provided for taxes on immovable property, which category of taxes is excluded from the legislative scope of the House, LHC said.

The petitioners misinterpreted the definition of taxation in Article 260 of the Constitution, which must be applied in the context of the category of taxes to be imposed by the Parliament of the provincial legislatures according to the scope of the legislative competence was awarded.

The LHC observed that in substance, foreign capital tax is not a tax on immovable property, but for all intents and purposes the subject(s) of such tax are resident natural persons as defined in section 13 (f) of the 2022 Act.

“Unquestionably, provincial legislatures are competent to tax immovable property – situated in their respective jurisdictions, irrespective of the domicile/residence of the owner, who may not reside within the territorial boundaries of the province where the property is situated – For example, the immovable property situated in the city of Lahore is taxed under the provisions of the Punjab Urban Immovable Property Tax Act 1958, which tax is levied on the property and has nothing to do with the residence of the owner, who may reside in Islamabad or Karachi.

Provinces cannot impose a capital value tax, which is calculated on the total capital value of assets held by an individual, which may include assets outside the territorial boundaries of the province or provinces – for example, various properties located simultaneously in different cities Lahore, Karachi, Peshawar, Quetta.

The LHC order said that due to the nature of the tax, only Parliament could make laws to levy tax on the total capital value of assets – foreign assets are the subject of challenge through these petitions. The tax on the capital value of the assets cannot be interpreted as a municipal tax, which otherwise applies to immovable property abroad according to the “Law of Situs”.

Parliament has variously made laws which have extraterritorial functions and their enforcement is hardly challenged by national courts. The tax in question does not concern foreigners but natural persons who have a fixed residence.

The LHC decision said that before the eighteenth amendment taxes on capital gains were excluded from entry 50 and after the amendment, the expression “on capital gains” was omitted, however, the exclusion to the extent of immovable property was retained.

Another fallacious argument is that since the foreign assets are domiciled in the foreign territory, which is subject to council tax under that jurisdiction, there is no taxation nexus/proximity and unless such nexus/proximity is established, Parliament cannot to submit the foreign assets liable. to the tax, the LHC order was added.



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