Taxpayers can seek refunds after Section 7E ruling

Taxpayers can seek refunds after Section 7E ruling

The Federal Constitutional Court’s decision striking down Section 7E of the Income Tax Ordinance, 2001, has opened the way for taxpayers to correct their tax records and seek refunds of amounts paid under the now-invalid provision.

Although the court has settled the constitutional dispute, taxpayers must still follow the prescribed procedures to remove the levy from their tax returns and recover any payments made under it. The judgment does not automatically revise tax returns, clear outstanding amounts in the Federal Board of Revenue’s (FBR) IRIS system or trigger refunds.

Introduced through the Finance Act, 2022, Section 7E treated 5% of the fair market value of certain capital assets owned by resident individuals as deemed income and imposed tax at 20% on that amount. The effective tax rate stood at 1% of the asset’s value. In practice, the provision primarily affected owners of immovable property and triggered a series of legal challenges.

The dispute came to an end in *Sher Muhammad Mughari v Federation of Pakistan*. On May 7, 2026, the Federal Constitutional Court declared Section 7E unconstitutional and struck it down as void ab initio, meaning it had no legal effect from the outset.

The court also nullified proceedings, assessments, demands, notices and other actions taken under the provision, while directing authorities not to enforce it. Applying the doctrine of pith and substance, the court concluded that the levy effectively targeted the capital value of immovable property rather than income.

Following the ruling, the FBR issued instructions to its field formations on September 23, 2026, directing them not to reject applications seeking revisions of income tax returns filed in light of the judgment.

Taxpayers who revise their returns and establish an entitlement to a refund must submit a separate refund application. The FBR has directed its field offices to process such applications promptly in line with the applicable laws and procedures.

The distinction is important: revising a return corrects a taxpayer’s declared tax position, but it does not automatically authorise repayment. Taxpayers must complete the refund process separately to recover amounts paid under Section 7E.