ISLAMABAD: The capital gain tax on the immovable properties has been revamped through Finance Bill 2019 in order to streamline taxation on gains at the time of sale of immovable properties.
According to commentary of EY Ford Rhodes Chartered Accountants on changes brought in Income Tax Ordinance, 2001 through Finance Bill 2019, the taxation of capital gains arising from disposal of capital assets is governed by Section 37 of the Ordinance.
After the introduction of Eighteenth Amendment in the Constitution of Pakistan, 1973, the Finance Act, 2012 introduced a significant amendment inserting Sub-section (1A) in Section 37 of the Ordinance providing for taxation of capital gains arising from disposal of immovable properties.
The rates of tax on such capital gains were applicable depending on the holding period of immovable properties ranging from 5 percent to 10 percent.
However, if the immovable property was disposed of after holding period of three years, the rate of tax is prescribed at zero percent.
“The Bill proposes to revamp the taxation of capital gains from disposal of immovable properties.”
Accordingly, it is proposed to omit Sub-section (1A) from Section 37 along with Division VIII of Part I of the First Schedule which contains rates of tax on such capital gains.
In its place, a new Sub-section (3A) is proposed to be inserted which contains separate mechanisms for computation of capital gain on disposal of (i) open plot, and (ii) constructed property.
The effect of the proposed amendment is that such capital gain (worked out by subtracting cost of the asset from the consideration received) will not be considered as a separate block of income liable to tax at reduced rates of 5 percent, 7.5 percent or 10 percent.
It will instead forms part of total income of the person and therefore, be taxed at the normal rates of tax applicable as per the First Schedule.
The capital gain will, however, be reduced by 25 percent depending on the holding period of the immovable property disposed of.
The reduction of 25 percent will apply if the holding period of open plot exceeds one year but does not exceed ten years and for constructed property from one year to five years.
Where the immovable property is disposed of after holding period of ten years and five years respectively, the capital gain will be taken to be zero.
An interesting outcome of this mode of taxation is that where the capital gain becomes zero depending upon the holding period as discussed above, super tax under Section 4B of the Ordinance will not apply for, there would not be any income recognizable for the purpose of computation of super tax.
The reduction of 50 percent of tax payable in respect of capital gains on disposal of immovable property on the first sale of immovable property acquired or allotted to ex-servicemen and serving personnel of Armed Forces or ex-employees or serving personnel of Federal and Provincial Governments, being original allottees of the immovable property, duly certified by the allotment authority remains intact as for this purpose Clause (9A) is also proposed to be inserted in Part III of the Second Schedule to the Ordinance.