A major shift in taxation on property income has been introduced through Finance Bill, 2021 and all taxpayers shall be subject to uniform taxation on net-income basis at the applicable rates.
According to commentary on budget 2021/2022 and Finance Bill, 2021, by PwC A. F. Ferguson & Co. Chartered Accountants, at present, Individuals and Association of Persons (AOPs) can opt for their property income to be chargeable to tax on gross rent without any deductions, at specified (lower) tax rates.
Companies’ property income, however, is subject to tax after certain admissible deductions at the applicable corporate rate.
Through the proposed amendments, property income for all taxpayers shall henceforth be subject to uniform taxation on net-income basis at the applicable rates.
Withholding tax rates applicable to the property income of Individuals and AOPs are also proposed to be revised as under:
1. Where the gross amount of rent does not exceed Rs300,000: No tax shall be levied
2. Where the gross amount of rent exceeds Rs. 300,000 but does not exceed Rs. 600,000: the tax shall be 5 per cent of the gross amount exceeding Rs. 300,000
3. Where the gross amount of rent exceeds Rs. 600,000 but does not exceed Rs. 2,000,000: the tax shall be Rs15,000 plus 10 per cent of the gross amount exceeding Rs. 600,000
4. Where the gross amount of rent exceeds Rs. 2,000,000: the tax shall be Rs155,000 plus 25 per cent of the gross amount exceeding Rs. 2,000,000.
Further, the adjustment of property income for a tax year against loss under any other head of income is proposed to be reinstated.
The adjustment of such losses could give rise to a situation where effectively no tax is payable on property income.
In order to give full effect to this amendment, the Government may, therefore, consider introducing enabling provision for issuance of exemption / reduced rate certificates in eligible cases.
The government has taken taxation measures on capital gains from disposal of immovable properties and introduced normal tax regime on gains on immovable properties above Rs 5 million.
According to commentary on budget 2021/2022 and Finance Bill, 2021 released by PwC A. F. Ferguson & Co. Chartered Accountants, under the existing provisions, gains on disposal of immovable properties are taxed at special (reduced) slab rates along with reduction in gain based on holding period.
Gains on disposal of immovable properties held for more than four years are effectively non-taxable .
The proposed amendment at the outset seeks to clarify that this regime for immovable properties is not applicable on persons habitually engaged in transaction of sale and purchase of properties or where sale is adventure in the nature of trade or business.
Income of such persons would be taxable under the head of business with consequential effect that no benefit of holding period and special rate of tax would apply.
Furthermore, it is proposed that gains up to Rs 5 million will be taxed at a special rate of 5percent as against the existing rate of 2.5 percent.
The gains exceeding Rs 5 million will be taxed at normal rate though the benefit of holding period in computation would continue to apply as per existing provisions given below:
1. Where the holding period of an immovable property does not exceed one year: the calculation for tax shall be
A = Consideration minus cost
2. Where the holding period of an immovable property exceeds one year but does not exceed two years: the calculation shall be A x 3/4
3. Where the holding period of an immovable property exceeds two years but does not exceed three years: the calculation shall be A x 1/2
4. Where the holding period of an immovable property exceeds three years but does not exceed four years: the calculation shall be A x 1/4
5. Where the holding period of an immovable property exceeds four years: the calculation shall be Zero
In case of disposal of a depreciable immovable property at a consideration higher than its cost, the provisions of law deem consideration as cost of such property, thus, resulting into recoupment of tax deprecation only.
The rationale for such provision was that the Federal Government did not have powers under the Constitution of Pakistan to tax gain on disposal of an immovable property .
However, the 18th amendment to the Constitution was construed by the Federal Government to have given them jurisdiction to tax such gains .
Consequently, specific provisions were introduced for the taxation of gains on immovable properties, but no such amendment was made for depreciable immovable assets.
An amendment is now proposed to tax the aforesaid ‘excess’ as capital gains under section 37. As a result, in case of depreciable immovable assets, the excess should be dealt in the same manner as applicable for other immovable properties particularly with the concept of holding period.
The placement and language of the proposed amendment contradict section 22(8) thus resulting in an anomalous situation, which should be reconsidered. 
