• Rules provincial levy aligns with the constitutional division of powers • Validates 2pc tax on contractors, developers, infrastructure projects • Notes firms can claim input tax adjustments on goods ISLAMABAD: The Federal Constitutional Court on Friday dismissed multiple petitions challenging the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022, ruling that the provincial levy on construction services does not contravene constitutional provisions governing the division of taxation powers between the federal and provincial governments. 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 including M/s Matracon Pakistan (Private) Limited, Anwar Khan, Khawaja Muhammad Khan, Zhongmei-Al Mehreen Joint Venture, Merryland Housing Society Mardan and Subhan Smart City Society Mardan had challenged Serial No. 14 of Schedule 2 to the act. The challenged provision imposed a 2 per cent 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 judgement observed that after examining Entry 49 of the Constitution — which states “taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services” — the court found no inconsistency between the impugned law and the Constitution. Entry 49 clearly stipulates that taxes on services cannot be imposed by the federation and the impugned law conforms to this mandate by imposing sales tax exclusively on construction services, the court said. While the FCC acknowledged the petitioners’ concern that the revenue authority was levying tax on entire contractual amounts, it noted that Section 2(a) of the act defines “input tax” as cost incurred in the utilisation of goods for the execution of services. The law allows registered persons to claim adjustments and refunds regarding tax paid under any other law on goods used in providing taxable services. The FCC also addressed an ancillary matter regarding its jurisdiction to hear tax references not expressly enumerated in the Constitution. It held that Article 175E(5) of the Constitution authorises the FCC to call for the record of any case where a substantial question of constitutional interpretation arises. 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. The FCC concluded that Serial No. 14 of Schedule 2 to the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022, was not ultra vires the Constitution. The judgement explained that the relevant constitutional and statutory provisions, when considered together, show no inconsistency. Published in Dawn, February 21st, 2026