The Federal Constitutional Court has upheld the Khyber Pakhtunkhwa government’s authority to impose sales tax on construction services, dismissing challenges filed by contractors and service providers against the provincial law.
The ruling relates to the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022, which introduced a 2 percent sales tax on various construction-related services. These include services provided by contractors, engineers, architects, developers, interior designers, and other professionals involved in construction projects. The tax applies to the construction of residential houses, commercial buildings, roads, bridges, flyovers, and similar infrastructure projects within the province.
Petitioners had argued that the province did not have the legal authority to impose such a tax. They claimed the levy was unfair because it was charged on the total contract value, including the cost of construction materials such as cement, steel, and other goods. According to them, taxing the full contract amount effectively meant imposing sales tax on goods, which they said fell outside provincial jurisdiction.
After reviewing the arguments, the Federal Constitutional Court concluded that the Khyber Pakhtunkhwa government acted within its constitutional powers. The court explained that under the Constitution, particularly following the 18th Amendment, provinces are empowered to impose taxes on services. Since construction activities are classified as services, they fall under provincial jurisdiction.
However, the court also acknowledged concerns regarding potential double taxation. It directed the provincial revenue authority to ensure clear implementation rules so that only the service component of construction contracts is taxed, while goods are not taxed again under the same category. This directive aims to prevent unfair financial burden on businesses and promote transparency in tax collection.
The ruling is being seen as an important legal development that clarifies provincial taxing powers and provides guidance for the construction industry operating in Khyber Pakhtunkhwa.
