Tax collection. Photo: file
ISLAMABAD:
The Federal Constitutional Court has declared the levy of sales tax on construction services in Khyber-Pakhtunkhwa constitutional and rejected appeals filed against the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022.
Headed by Justice Aamer Farooq, a two-judge FCC bench heard a number of challenges against a judgment of the Peshawar High Court on May 13, 2025.
Petitioners had contested serial number 14 in Schedule 2 to the Act. The impugned provision imposed a 2% sales tax on services rendered by building contractors, architects, civil engineers, real estate promoters, developers, planners, interior designers and related professions.
It specifically covers construction services relating to structures, buildings, roads, bridges, underpasses, flyovers, electromechanical works, turnkey projects and engineering, procurement and construction contracts.
Orders issued by the Khyber Pakhtunkhwa Revenue Authority demanded tax for the period from July 2021 to April 2022 on amounts received by the petitioners under construction contracts, which included the price of goods to be supplied by the contractors.
The legal issue before the FCC was whether serial number 14 of Schedule 2 was unconstitutional.
The court ruled that after the 18th constitutional amendment, the power to levy tax on services rests with the provinces.
The written judgment was delivered by Justice Aamir Farooq. It held that after the 27th Constitutional Amendment, the Supreme Court can no longer strike down laws on constitutional grounds as the power of constitutional interpretation is limited to a designated forum.
The court noted that under the 27th Constitutional Amendment, the Constitutional Court can require records from any court or tribunal to examine constitutional issues.
According to the judgment, serial number 14 of Schedule II of the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 is not unconstitutional. The court clarified that the federal government only has the power to levy tax on goods while construction activities fall under the category of services.
The court found that serial number 14 of the Act specifically relates to construction services and does not include goods; therefore, it cannot be declared unconstitutional.
The court also ordered that a mechanism be devised to ensure that no citizen or company is exposed to double taxation on the same subject. To this end, the tax authority has been instructed to draft clear principles that require contractors to clearly separate their total project budget into services and goods, ensuring transparency in tax implementation.
The FCC noted that some constitutional provisions were “qualifying” and also “enumerative”. Article 175E, subsection 5, is of this nature, it is stated.
The Court held that Article 175E(5) authorizes the FCC to decide cases involving substantial questions of constitutional interpretation even in the absence of express jurisdiction. In the instant case, the court said that such a question clearly arose in the form of a challenge to the vires of the Act.
