Rental commercial property: Question arises on legality of taxation by Punjab govt
A review of Punjab Sales Tax on Commercial Property by Muhammad Asif Asgher Attorney-at-Law, former Chief Commissioner Inland Revenue/ former Member, Appellate Tribunal Inland Revenue (ATIR) revealed that Punjab's move to tax commercial rentals reflects the broader post-Eighteenth Amendment trend of provincial revenue expansion. However, the constitutional boundaries of such powers- especially where the same income stream is already federally taxed- remains unsettled. The eventual judicial outcome will determine whether this revenue measure becomes a permanent fixture or another short-lived experiment.
Muhammad Asif Asgher stated that the Eighteenth Amendment to the Constitution of Pakistan, 1973 brought sweeping changes, the most significant being the omission of the Concurrent Legislative List from the Fourth Schedule. Prior to the amendment, the Federal Legislative List (FLL) contained subjects under exclusive federal competence (Article 142), while the Concurrent List allowed both the Federation and Provinces to legislate.
With the deletion of the Concurrent List, legislative power over its subjects was devolved to the provinces. In addition, certain subjects were removed from the FLL itself. Notably, Clause 49 was amended to read: 'Taxes on the sale and purchase of goods imported, exported, produced, manufactured and consumed (except sales tax on services).'
This seemingly small bracketed phrase empowered provinces to levy sales tax on services, creating a significant new revenue stream.
Tax expert said that following the Eighteenth Amendment, provinces quickly established their own frameworks for taxing services. Punjab enacted the Punjab Sales Tax on Services Act, 2012, and Sindh passed the Sindh Sales Tax on Services Act, 2011.
A key drafting challenge was defining 'services' broadly enough to capture emerging transactions. Section 2(38) of the Punjab Act states:
'Service' or 'services' means anything which is not goods or the providing of which is not a supply of goods, and shall include but not be limited to the services listed in the First [or Second] Schedule.
This open-ended definition- whether borrowed from India's GST or developed locally — ensured that almost any activity outside the definition of 'goods' could be taxed.
Traditionally, a 'service' involves the application of human effort or skill for another's benefit. However, Sindh was first to extend this to letting out of immovable property, reasoning that it did not involve the supply of goods. Amendments were made to include this within the definition of 'service,' and the Sindh Revenue Board began issuing tax notices to landlords.
The Sindh High Court, in 2019 PTD 389, faced constitutional and interpretive challenges to taxing immovable property rentals. Rather than directly ruling whether such letting constituted a 'service,' the Court focused on Section 4 (1) (b) of the Sindh Act, which referred only to 'movable property' in defining 'economic activity.' The Court inferred that immovable property was excluded.
The Supreme Court, in 2023 PTCL 96, dismissed the Sindh Government's appeal with a single-line observation: 'The mere renting out of property by a landlord to a tenant is not taxable as it is not a taxable service.'
Notably, the Court gave no reasoning, leaving the constitutional question open and arguably outside the binding scope of Article 189.
Former Member Appellate Tribunal stated both Sindh and Punjab amended their laws to explicitly include immovable property in 'economic activity.' Punjab's change came via the Finance Act, 2018 (effective 1 November 2018). However, Punjab delayed taxing such rentals until Finance Act, 2025, which revised the First Schedule:
(i); Exempt: dwellings rented for non-commercial use.
(ii); Taxable: dwellings and other immovable property rented for commercial use.
The Punjab Revenue Authority has since begun issuing notices to landlords for registration and tax payment. Landlords argued they are already paying income tax on rental income and that this dual taxation is impermissible. One possible ground, relying on 2017 PTD 1 (Pakistan International Freight Forwarders), is that post-Eighteenth Amendment there is no concurrent taxing power: a single taxable event cannot be subject to both federal and provincial levies.
Another round of constitutional litigation appears inevitable, Muhammad Asif Asgher added.
Copyright Business Recorder, 2025
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