Tax collection. Photo: file
ISLAMABAD:
The Federal Constitutional Court has declared the levy of sales tax on construction services in Khyber-Pakhtunkhwa constitutional, dismissing appeals filed against the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022.
Headed by Justice Aamer Farooq, a two-judge bench of the FCC considered a number of challenges against a May 13, 2025 judgment of the Peshawar High Court.
The petitioners had challenged serial number 14 of Schedule 2 of the Act. The challenged provision imposed a 2% sales tax on services provided by construction contractors, architects, civil engineers, real estate developers, developers, planners, interior designers and related professions.
It specifically covers construction services related to structures, buildings, roads, bridges, underpasses, viaducts, electromechanical works, turnkey projects and engineering, procurement and construction contracts.
Show cause notices issued by the Khyber Pakhtunkhwa Revenue Authority demanded tax for the period July 2021 to April 2022 on the amounts received by the petitioners under construction contracts, which included the price of goods to be supplied by the contractors.
The legal question before the FCC was whether serial number 14 of Schedule 2 was unconstitutional.
The Court held that after the 18th constitutional amendment, the power to impose taxes on services rested with the provinces.
The written judgment was delivered by Justice Aamir Farooq. He said that following the 27th Constitutional Amendment, the Supreme Court can no longer strike down laws on constitutional grounds, as the power to interpret the Constitution has been limited to a designated forum.
The Court observed that after the 27th Constitutional Amendment, the Constitutional Court can seek records from any court or tribunal to consider constitutional questions.
According to the verdict, Section No. 14 of Schedule II of the Khyber Pakhtunkhwa Services Sales Tax Act, 2022 is not unconstitutional. The court clarified that the federal government is empowered to levy taxes only on goods, while construction activities fall under the category of services.
The court held that serial number 14 of the Act specifically related to construction services and did not include property; therefore, it cannot be declared unconstitutional.
The court further ordered that a mechanism be devised to ensure that no citizen or business is subjected to double taxation on the same subject. To this end, the tax authority has been tasked with developing clear principles requiring contractors to clearly separate their total project budget into services and goods, thereby ensuring transparency in the application of taxes.
The FCC observed that certain constitutional provisions “confer character” and “also enumerate powers.” Section 175E(5) is of this type, she said.
The court held that Section 175E(5) authorizes the FCC to rule on matters involving substantial questions of constitutional interpretation, even in the absence of express jurisdiction. In the present case, the court said that such a question clearly arose in the form of a challenge to the vires of the statute.
