Tax collection. Photo: archive
ISLAMABAD:
The Federal Constitutional Court has declared the collection 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 took up a series of challenges against a May 13, 2025 Peshawar High Court ruling.
The petitioners had challenged the law under serial number 14 of Schedule 2. The impugned provision imposed 2% sales tax on services provided by construction contractors, architects, civil engineers, real estate developers, developers, planners, interior decorators and allied professions.
It specifically covers construction services related to structures, buildings, roads, bridges, underpasses, flyovers, electromechanical works, turnkey projects and engineering, procurement and construction contracts.
The 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 under construction contracts, which included the price of goods to be provided by the contractors.
The legal question before the FCC was whether Series No. 14 of Schedule 2 was unconstitutional.
The court ruled that after the 18th Constitutional Amendment, the authority to impose taxes on services lies with the provinces.
The written judgment was delivered by Justice Aamir Farooq. He stated that after 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 can request minutes of any court or tribunal to examine constitutional issues.
According to the verdict, the 14th series of Schedule II of the Khyber Pakhtunkhwa Services Sales Tax Act, 2022 is not contrary to the Constitution. The court clarified that the federal government is empowered to impose taxes only on goods, while construction activities fall under the category of services.
The court held that Series No. 14 of the Act relates specifically to construction services and does not include goods; Therefore, it cannot be declared unconstitutional.
The court further ordered that a mechanism be devised to ensure that no citizen or company is subject to double taxation on the same issue. For this purpose, the tax authority has been directed to establish clear principles requiring contractors to clearly separate the total project budget into services and goods, ensuring transparency in fiscal implementation.
The FCC noted that some constitutional provisions “confer character” and also “enumerate powers.” Section 175E(5) is of this type, he said.
The court held that Section 175E(5) authorizes the FCC to resolve matters involving substantial questions of constitutional interpretation, even in the absence of express jurisdiction. In the present case, the court said that such issue arose directly in the form of a challenge to the vires of the law.
