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Once a Tax Exemption applies, it creates a Vested Right --- Lahore High Court Declares Amendment of Finance Act 2022’s Unconstitutional which charged Tax Retrospectively

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Once a Tax Exemption applies, it creates a Vested Right --- Lahore High Court Declares Amendment of Finance Act 2022’s Unconstitutional which charged Tax Retrospectively

Islamabad 03-03-2025: In a landmark ruling, the Lahore High Court (LHC) has set aside the Finance Act, 2022’s amendment that imposed a 12.5% capital gain tax on securities acquired before June 30, 2022, declaring it unconstitutional. The judgment, delivered by Mr. Justice Abid Hussain Chattha and Mr. Justice Shams Mehmood Mirza in [ICA No. 155 of 2024] Manzur-ul-Haq Vs. Federation of Pakistan & Others, restores tax exemption for securities held for an extended period.

The Appellant had acquired securities in 2011 under Section 37A of the Income Tax Ordinance, 2001, which exempted securities held beyond one year from capital gain tax. However, Finance Act, 2022 introduced a first proviso to Division VII, imposing a flat 12.5% capital gain tax on all securities acquired before June 30, 2022, effectively removing long-standing tax exemptions.

The Appellant challenged this retrospective taxation, arguing that it violated his vested rights and was discriminatory, as securities acquired after July 1, 2022 were subject to different tax rates. His constitutional petition was earlier dismissed by a Single Judge, leading to this Intra Court Appeal (ICA).

The Lahore High Court ruled in favor of the Appellant, holding that:

The Court relied on the Sindh High Court’s precedent in Anwar Yahya Vs. Federation of Pakistan (2017 PTD 1069), which held that once a tax exemption applies, it creates a vested right. The Finance Act, 2022’s retrospective tax violated this right, making it unconstitutional.
The 12.5% tax was introduced via a proviso in Division VII instead of modifying Section 37A, which is the main charging provision. The Court cited Excise & Taxation Officer Vs. Burmah Shell (1993 SCMR 338) and Collector of Customs Vs. Young Tech (2024 PTD 306), holding that a tax schedule cannot create a new liability it must be defined in the charging provision.
The Court reaffirmed the principle of strict interpretation in tax laws, citing the U.S. Supreme Court case Welch Vs. Henry (305 U.S. 134, 1938) and the Pakistani Supreme Court’s ruling in Mekotex (PLD 2024 SC 1168). Since the Finance Act, 2022 lacked clear legislative intent for retrospective taxation, the amendment was held inoperative.
The judgment also noted that the Finance Act, 2024 reinstated 0% tax on securities acquired before July 1, 2013, proving that the 2022 amendment created unjustified discrimination. The Court ruled that differential tax treatment without a rational basis violates fundamental tax principles.

The Lahore High Court allowed the Intra Court Appeal, set aside the 12.5% capital gain tax imposed under Finance Act, 2022, and restored the Appellant’s right to 0% tax on securities disposed of between July 1, 2022, and January 2023.