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 FCC bench addressed a number of challenges against a May 13, 2025, Peshawar High Court judgement.
Petitioners had challenged Serial No 14 of Schedule 2 to the act. The challenged provision imposed a 2% sales tax on services provided by construction contractors, architects, civil engineers, property promoters, developers, planners, interior decorators and allied professions.
It specifically covers construction services relating to structures, buildings, roads, bridges, underpasses, flyovers, electro-mechanical works, turn-key projects, and engineering, procurement and construction contracts.
Show-cause notices issued by the Khyber Pakhtunkhwa Revenue Authority demanded tax for the period from July 2021 to April 2022 on amounts received by the petitioners pursuant to construction contracts, which included the price of goods to be provided by the contractors.
The legal question before the FCC was whether Serial No. 14 of Schedule 2 was unconstitutional.
The court ruled that after the 18th Constitutional Amendment, the authority to impose tax on services rests with the provinces.
The written judgment was issued by Justice Aamir Farooq. It stated that following the 27th Constitutional Amendment, the Supreme Court can no longer strike down laws on constitutional grounds, as the power of constitutional interpretation has been restricted to a designated forum.
The court observed that after the 27th Constitutional Amendment, the Constitutional Court may call for records from any court or tribunal to examine constitutional questions.
According to the verdict, Serial No. 14 of Schedule II of the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022, is not contrary to the Constitution. The court clarified that the federal government is empowered to levy tax only on goods, whereas construction activities fall within the category of services.
The court held that Serial No. 14 of the Act specifically relates to construction services and does not include goods; therefore, it cannot be declared unconstitutional.
The court further directed that a mechanism be devised to ensure that no citizen or company is subjected to double taxation on the same subject. For this purpose, the revenue authority has been instructed to frame clear principles requiring contractors to distinctly segregate their total project budget into services and goods, ensuring transparency in tax implementation.
The FCC observed that some constitutional provisions were “character-conferring” and also “competence-enumerating”. Article 175E(5) is of this kind, it said.
The court held that Article 175E(5) authorises the FCC to adjudicate matters involving substantial questions of constitutional interpretation, even in the absence of express jurisdiction. In the present case, the court said such a question squarely arose in the form of a challenge to the vires of the law.
