The federal government, through Finance Act 2012, amended section 37(5) of the Income Tax Ordinance, 2001 and for the first time levied income tax on gain of immovable property. Punjab levied a similar tax in Finance Act 2013 contesting the authority of the federal government to do so. The question is that who has the right under the Constitution to levy this tax? Obviously, both the federal government and the provinces cannot use item No 50 of the federal legislative list of the fourth schedule to the 1973 Constitution to levy tax on gain of immovable property. The right under this item is exclusive within our constitutional framework. The federal government can levy taxes on matters enumerated in the federal legislative list and residual matters fall in the domain of the provinces.

According to the Federal Board of Revenue (FBR), prior to the amendment in item No 50 through eighteenth amendment, the National Assembly had no power to levy capital gain tax on disposal of immovable property but after the eighteenth amendment, the right vests with it. Item No 50 as exists today reads as under:

"50. Taxes on the capital value of the assets, not including taxes on immovable property"

Prior to the amendment, the language of Item No. 50 was:

"50. Taxes on the capital value of the assets, not including taxes on capital gains on immovable property"

After omission of words "capital gain" from item No 50 through the 18th amendment act of 2010, the FBR purportedly sought the opinion of Law and Justice Division about its scope and import. According to the FBR, the Law and Justice Division endorsed its point of view that under the amended item No 50, the levy of income tax on capital gain on the disposal of immovable property had become a federal subject so national parliament could legislate on it.

In Finance Act 2012, section 37(5) of the Income Tax Ordinance, 2001 was amended to bring capital gain on immovable property in the ambit of taxation. Two new sections, 236C and 236K were also inserted in the Income Tax Ordinance, 2001, in 2012 and 2014 respectively, for collection of advance tax from the seller and buyer at the time of sale/purchase/transfer of immovable property. In 2012, the FBR was of the view that capital gain tax on disposal of immovable property would help in broadening of tax base and substantially enhance revenue -- both the assertions have proved wrong as both the number of filers as well as revenue from this source have substantially decreased.

Claim of the FBR that levy of advance tax on sale/purchase/transfer of immovable property would play a major role in plugging one of the many loopholes for whitening untaxed money in the name of capital gain proved baseless as evident from daily transactions in societies like DHA and Bahria Town. The FBR did not realise that in the presence of section 111(4) of the Income Tax Ordinance, the investors had a window to arrange funds (whitened) through remittances by paying a small premium to the exchange companies!

In fact, the very imposition of the Capital Gain Tax (CGT) on immovable property by the FBR was unconstitutional. It was based on self-assumed (mis)interpretation of amended language of item 50. The phrase "not including taxes on immovable property" cannot be read to "include taxes on capital gains on immovable property." Provinces have failed to understand that their right to tax gain on immovable property situated within their territories is undisputable and is being encroached upon by the federal government since 2012. Only the Punjab Assembly levied this tax in Finance Act 2013, but the government has not yet bothered to enforce it.

In 2012, the National Assembly was misled by the FBR and Law and Justice Division that amendment in item No 50 of the Federal Legislative List through 18th amendment vested them with power to levy CGT on immovable property. In fact, it debars the federation to levy any kind of tax on immovable property. Therefore, even the Capital value Tax (CVT) on immovable property stands transferred to provinces since 2010.

If the federation cannot levy any tax on immovable property, how can it tax "capital gain" arising out of immovable property? This simple proposition could not be comprehended either by our parliamentarians and tax bureaucrats who "brief" them in tax matters!

The erstwhile Wealth Tax Act, 1963 was levied under item No 50 of the federal legislative list and imposition was challenged under Article 199 of the Constitution. The matter went up to the Supreme Court. In its decision reported as Haji Mohammad Shafi and Others v Wealth tax Officers and Others 1992 PTD 726, the Supreme Court held that Parliament under item No 50 of federal legislative list was competent to levy wealth tax on the value of assets. It was held that the manner in which valuation of any immovable asset was made could not be termed "tax on capital gain". Before the amendment in item No 50 of federal legislative list by the 18th amendment, the federation was barred from taxing "capital gain on immovable asset." Now this bar has been extended to "taxes on immovable property". This bar is made wider and not otherwise as misunderstood by the FBR and National Assembly.

One wonders how the FBR and Law and Justice Division by mere omission of words "capital gains" in item No 50 of the federal legislative list have concluded that right to taxation has been shifted to federal government. The National Assembly also levied CGT on immovable property in utter violation of the Constitution. They have failed to see that second part of item 50 is couched in a negative phrase. It is obvious that nobody bothered to study item No 50 in its proper context ignoring the dictum laid down by Supreme Court in Haji Mohammad Shafi and Others v Wealth tax Officers and Others 1992 PTD 726.

The phrase "not including taxes on immovable property" in item 50 cannot be read to "include taxes on capital gains on immovable property". The FBR in order to find out the intention behind this amendment should have approached the Implementation Commission on 18^th amendment which it apparently never did.

From the plain reading of item No 50, as it stands after the 18^th amendment, it is unambiguous that the Parliament can levy taxes on capital value of moveable assets but has no authority to levy taxes, including capital gain tax, on immovable property. It is obvious that taxes include tax on capital gains. The way FBR and Law and Justice Division read plain language of item No 50 speaks volumes about their level of competence as well as hollowness of our parliamentarians in passing laws as drafted by tax bureaucrats and vetted by baboos sitting in Law and Justice Division. No wonder why we have so much confusion and chaos in revenue and legal matters!

The rich and mighty landowners, through the 18^th constitutional amendment, have deprived the Parliament from levying wealth tax on their colossal immovable property -- on their heavy agricultural incomes, they are already not paying due tax. Before levying CGT on immovable property, the FBR should have consulted experts in constitutional law rather than merely relying on Law and Justice Division. The Supreme Court in the recent months has passed strictures about poor understanding of law by the Law and Justice Division! But the man at the top loves to have sycophants, cronies and incompetents around him. This is how we make mockery of everything -- even the supreme law of the land.