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The Federal Board of Revenue (FBR) has decided to refund tax collected on deemed income from immovable properties under Section 7E of the Income Tax Ordinance, 2001.
Waheed Shahzad Butt, chairman of the Lahore Tax Bar Association’s Public Interest Litigation Committee (LTBA-PILC), said the FBR had issued a circular to formalise the refund process. Business Recorder also reported the development.
The decision follows more than four months of correspondence between Butt and FBR officials.
Butt had repeatedly asked the tax authority to establish a formal procedure for taxpayers seeking refunds after the Federal Constitutional Court (FCC) struck down Section 7E.
In a September 23 letter to chief commissioners of Inland Revenue, the FBR instructed field formations to accept requests from taxpayers seeking to revise returns in light of the FCC ruling.
The FBR specifically directed officials not to reject such requests.
It also instructed field offices to process resulting refunds expeditiously according to the applicable law and procedure.
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The directive follows the FCC’s May 7, 2026 order against Section 7E. The court declared the provision unconstitutional and void from its inception. It also annulled proceedings, notices and actions taken under the provision.
Section 7E treated certain immovable property as generating deemed income.
Under the provision, the tax system generally treated deemed rental income as equivalent to 20% of the FBR-assessed value of qualifying properties. A 5% tax on that deemed income effectively produced a levy of about 1% of the property value.
The provision entered the Income Tax Ordinance through the Finance Act, 2022.
The FCC later ruled that Section 7E effectively imposed a tax on the capital value of immovable property rather than income. The court therefore found that the federal legislature lacked constitutional authority to impose the levy.
The FBR’s latest directive gives taxpayers a route to seek refunds through revised returns.
Previously, the tax authority had not issued a specific mechanism for taxpayers to recover amounts paid under Section 7E. Butt raised the issue with the FBR for several months and sought a formal procedure.
The FBR has now told field offices to process eligible requests rather than reject them.
However, the directive focuses specifically on Section 7E revisions and refunds. It does not automatically extend the same treatment to other tax disputes.
Butt also highlighted a separate issue involving Super Tax under Section 4C of the Income Tax Ordinance.
The FCC upheld Section 4C but excluded certain exempt capital gains and other exempt income from its scope, according to the tax committee chairman.
The FBR has yet to announce a separate refund mechanism for those amounts.
Butt has proposed that the government credit amounts collected under Sections 7E and 4C against taxpayers’ 2026 tax liabilities until it establishes a comprehensive refund policy.
He also urged the FBR to apply the same expedited approach to eligible Super Tax claims.
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