The Federal Constitutional Court has declared Section 7E of the Income Tax Ordinance, 2001, ultra vires the Constitution and struck it down as void ab initio. The judgment, issued on May 7, 2026, in the case of Sher Muhammad Mughari v Federation of Pakistan, annulled all proceedings, actions, assessments, demands, and notices initiated under the provision and restrained authorities from giving effect to it.
The court found that the levy, introduced through the Finance Act, 2022, was imposed upon the capital value of immovable property rather than income. Although the provision was framed as "deemed income" on 5% of the fair market value of specified capital assets, the court applied the doctrine of pith and substance to determine its essential character. Under the Eighteenth Amendment, Entry 50 of the Federal Legislative List excludes taxes on immovable property from federal authority over capital value, while Entry 47 authorizes taxation of income other than agricultural income.
While the judgment provides the substantive basis for relief, the court's ruling does not automatically amend tax returns, remove amounts from the IRIS system, or generate refunds. Taxpayers must still follow a specific procedure to recover amounts paid under the provision.
On September 23, 2026, FBR issued instructions to its field formations directing that requests for revision of returns filed in consequence of the judgment should not be rejected. If a revision results in a refund, the subsequent application must be processed expeditiously according to applicable law and procedure.
The appropriate treatment depends upon how the taxpayer originally dealt with Section 7E. For those who paid the full liability during filing, the entire Section 7E liability should be eliminated and the payment recognized as excess tax. For those who deposited only 50% under interim judicial directions, the entire computation should be removed, but the refund is confined only to the amount actually paid; the unpaid balance is not refundable.
To begin the process, taxpayers should perform a year-wise reconciliation of their original return, wealth statement, Section 7E computation, computerized payment receipt, interim orders, departmental correspondence, and the IRIS ledger. Once records are linked, an application may be submitted under Section 114(6) to identify the wrong statement and explain its connection to the constitutional judgment.
After the revised return eliminates the liability and recognizes the payment, a separate refund application is ordinarily required under Section 170. This section allows taxpayers who paid tax exceeding the amount properly chargeable to apply for a refund. The commissioner must issue a written decision within 60 days of receiving the application.
Taxpayers must be careful regarding limitations. Refund applications must generally be filed within three years of the relevant assessment order or the date tax was paid. The FBR's direction to process applications in accordance with law does not resolve every limitation issue, and taxpayers should not assume that revision necessarily renews the period for claiming a refund.
The FBR could facilitate implementation through a standard electronic workflow, a dedicated revision category, a documentary checklist and automated reconciliation of Section 7E payments. IRIS should display the original liability, amount paid, revised liability and amount potentially refundable. This would protect revenue against unsupported claims while allowing genuine refunds to be processed consistently.
