The Saga of FBR and the FED
April 2025
Reading Time: 5 minutes
The infamous Federal Excise Duty (FED), imposed by Federal Revenue of Board (FBR) in September 2024, has finally abolished by the government in April 2025, after the FED proved to be an abysmal failure. It faced massive criticism for its ad-hoc nature and legal challenges for infringing on provincial rights granted by the 18th amendment. Yet despite the storm it generated, it failed to generate revenue for the government and managed to further hamper the already slow real estate market.
Origin of FED:
Earlier on September 6, 2024, FBR notified changes to the Federal Excise Rules, 2005. According to the new rules, developers and builders were now required to collect duties at the time of allotment or transfer for commercial properties, while for residential properties and open plots, duties were to be collected at the first allotment or transfer of properties.
Importantly, FED was applicable on first-time sale of properties which meant that it targeted new entrants to the property market, creating a barrier to entry in the real estate market.
The amount of duty was set up to distinguish between filers, late filers and non-filers. As per the original notification, for filers the duty was 3%, for late filers it was 5%, and for non-filers it was 7%.
A filer is someone on the Active Taxpayer List and has paid their income tax for 2023, a late filer is on the Active Taxpayer List but has not paid their income tax for the year 2023 and non-filer is someone not on the Active Taxpayer List.
The late filer category was introduced in the Finance Bill 2024 earlier in July 2024 along with a host of other changes including new rules on Capital Gains Tax for property transactions, outlined here. The category was subsequently banished due to public outcry and confusion on enforcement.
Process of FED:
The duties collected from FED were to be remitted to the federal government on the same day they were collected. In case of any delay, Inland Revenue Office will be responsible for both collecting the dues and any additional surcharges levied for delay in payment of dues.
Issues with FED:
The change in Federal Excise Rules was just one step in FBR and the government’s attempt to improve tax collection and further increase penalties on non-filers. However, this step by the FBR created more legal and economic problems for the government.
The issue is with the nature of the FED itself. It is unclear at this stage how FBR views the FED it has imposed on transfer and allotment of properties by builders and developers. Is the FED a form of Capital Value Tax (CVT) or is it being levied against some good or service?
FBR is responsible for collecting taxes for all subjects that fall under the Federal Government. As per the 18th Amendment to the Constitution of Pakistan, the federation (represented by FBR) has no right to impose CVT on any immovable property except in Islamabad Capital Territory (ICT) as this falls under the jurisdiction of the provinces. This much has been acceded by FBR itself in its Circular 3 of 2012.
On the other hand, if FED is being collected for goods or services provided by the builders and developers, then as per the 18th Amendment once more, this subject falls under the provincial governments as Article 49, Part 1 of Federal Legislative List, Fourth Schedule of the Constitution clearly states that the right of such taxation falls to the provinces. As a result, FBR once more has no authority to levy these duties, even if the National Assembly has empowered it to do so as the matter does not fall under the National Assembly’s jurisdiction.
Conclusion:
Predictably, the move faced legal challenges with the first challenge coming from Sindh where the matter was raised with the Sindh High Court (SHC). Separately, DHA Islamabad challenged the FED in IHC, claiming that transfer and allotment of properties is not a service and immovable property is not a good as per Federal Excise Act 2005, on which FED can be charged.
It should be noted that the real estate sector has become burdened with many taxes after the passage of Finance Act 2024 in July which has rendered property transactions increasingly unprofitable.
Sources:
https://www.brecorder.com/news/40321133
https://www.brecorder.com/news/40324467
https://www.brecorder.com/news/40324680
