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LHC Blocks Retroactive Income Tax on Property Transactions
The Lahore High Court (LHC) has ruled that the Federal Board of Revenue (FBR) cannot impose newly introduced income tax rates for late filers on past property transactions. The decision came after the Defence Housing Authority (DHA) filed a petition, challenging the FBR’s application of higher tax rates on deals closed in earlier tax years.
DHA argued that the amendments made through the Finance Act 2024, which introduced higher withholding tax rates for filers, late filers, and non-filers, should only apply to transactions made after the law’s enactment. The LHC agreed, ruling that the law cannot apply retroactively unless explicitly stated.
Impact of New Tax Rates on Real Estate
The court clarified that Rule 1A, which introduced the new tax categories, “shall not affect past transactions”. This means property deals concluded before the 2024 Finance Act cannot be taxed under the new rates.
In the 2024 budget, the government raised withholding taxes on:
- Property sales: 4% for filers, 8% for late filers, and 10% for non-filers.
- Property purchases: 4% for filers, 8% for late filers, and 20% for non-filers.
Despite these increases, withholding tax collection dropped by 7% in the first quarter of the fiscal year. The FBR collected Rs48 billion, down by Rs3.1 billion compared to the previous year, reflecting slower activity in the real estate sector.
Court’s Recommendations to the FBR
The LHC stressed that fiscal laws cannot be applied retroactively unless this is explicitly stated by lawmakers. The court suggested that the FBR should hire experienced draftsmen to avoid such legal challenges in future legislation.
Moreover, the extension of tax return deadlines this year has further complicated the issue. The FBR extended the deadline to October 30, which diluted the purpose of the late filer category. This also turned it into a tool for additional tax collection rather than a means to encourage timely filings.
Future Outlook
This ruling serves as a reminder that clearer laws are essential for effective tax collection. While past transactions are protected by this ruling, the FBR will need to balance its push for higher compliance with its need to meet revenue targets in the future.
