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Consensus has reached between the representatives of real estate and FBR. Another amnesty scheme is on cards with a capital gain tax rate of 4% instead of 10%. Since the announcement of Federal Budget 2016-17, different news & views have been circulating in print media regarding revision in applicable taxes and the amended section 68 of Income Tax Ordinance 2001 for determining fair market value of the property to be purchased or transacted in the registrar office after June 30th 2016.
Many of us are still confused about the recent changes impacting the ream estate market. This has been elaborated below by an example followed by explanation:
Advance Income Tax (adjustable) on purchase of immovable property under Section 236-K increased from 1% to 2% for tax filers and from 2% to 4% for non-filers
Advance Tax (adjustable) on sale of immovable property under Section 236-C increased from 0.5 to 1% for filers and from 1 to 2% for non-filers
Capital Gains Tax (CGT) has undergone two major changes in terms of time frame and fair market valuation of sale price, which are summarized below:
a) CGT will be levied at the rate of 10% of difference between the fair market value at the time of sale and purchase if the property is sold within 5 years of its purchase.
b) Fair Market Value: The Finance Bill has inserted a sub section in Section-68 wherein the concerned Federal Board of Revenue (FBR) officer can refer a certain property for its fair valuation to valuators approved by State Bank of Pakistan. To this effect, State Bank has already issued relevant notification along with its approved list of valuators. Secondly, the Finance Bill specifically mentions that the current Deputy Commissioner (DC) rates do not bind FBR to use it as reference for property valuation. It is important to mention that under the Income Tax Ordinance, Commissioner had valuation powers but due to certain reasons, these powers were inoperative and consequently DC rate was used and accepted by FBR as the sale price for any property.
The examples below would better illustrate the impact of above amendments especially those made in the CGT.
For the sale of a 1 kanal residential plot in
DHA Lahore from Phase I to VIII, which was bought and registered in the last 5 years, with its current average market value of PKR 20 million, seller will be paying Capital Gain Tax as below:
CGT = 10% of Market Value of Plot (MVP) – Declared Value of plot (DVP) at the time of purchase
DVP (in last 5 years) = DC Rate Value at the time of purchase = approx. 7 million/kanal (average DC Rate for DHA Lahore residential plots in Phase I, II, III, IV and V in the last 5 years)
So CGT = 10% of MVP (PKR 20 million) – DVP (PKR 7 million) = PKR 1.3 million
Also, remember that 1% and 2% Adjustable Advance Tax will be applicable on filers and non-filers respectively. For filers, it will be adjusted in terms of claiming credit when they file annual tax returns but for non-filers, it will be an additional cost of PKR 400,000 in the stated case. If Transfer Fees, CVT and Stamp Duty are added strictly as per the law, a minimum of PKR 2 million would be paid from July 1, 2016 onwards on the sale of every 1 kanal residential plot in DHA Phase I-VIII
Primarily, these changes in the tax statute are supposed to take black money (the untaxed money that was invested in the real estate sector) into account. The transactions took place at the DC rate, which in certain cases, especially for commercial plots, was ten times less than the fair market value of the property. For overseas investors who have to bring in their money through banking channels, the change in law should not be a cause of worry.
As far as the doubled withholding tax rates on sale and purchase of property are concerned, it is being done primarily to increase the cost real estate transactions for non-filers. Overseas investors, on the other hand, can file their annual income tax returns and claim the credit in advance taxes paid in their annual income tax returns.
In Property Tax 2016 view of the above discussion, a downward correction or a breather thereafter in the
prices of the overall real estate in the country is eminent. However, the major impact of all these changes will be observed on the black-money holders and their strategy to park their untaxed money in high-tagged assets that enable them to launder the black money. The only impact on the market would be a reduction in the value of investments, however, that is merely a short-term effect, as the market is likely to regain equilibrium in the long run. It is expected that the market will grow slowly and steadily