The federal government has implemented capital gains tax (CGT) ranging up to 15 percent on the disposal of immovable properties within one year of purchase.
This measure, introduced through amendments to Section 37 of the Income Tax Ordinance, 2001, was unveiled in the budget for the fiscal year 2022/2023, announced on June 10, 2022.
The Finance Bill 2022 brought about changes to Section 37, with a significant modification to sub-section 1A, which now states: “Notwithstanding anything contained in sub-section (1), gain arising on disposal of immovable property situated in Pakistan, to a person in a tax year shall be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule.”
The specified rates under Division VIII of Part I of the First Schedule outline a graduated tax structure based on the holding period of the immovable property. The rates are as follows:
1. Holding Period Up to One Year:
• Open Plots: 15%
• Constructed Property: 15%
• Flats: 15%
2. Holding Period Exceeding One Year but Not Exceeding Two Years:
• Open Plots: 12.5%
• Constructed Property: 10%
• Flats: 7.5%
3. Holding Period Exceeding Two Years but Not Exceeding Three Years:
• Open Plots: 10%
• Constructed Property: 7.5%
• Flats: 0%
4. Holding Period Exceeding Three Years but Not Exceeding Four Years:
• Open Plots: 7.5%
• Constructed Property: 5%
• Flats: 0%
5. Holding Period Exceeding Four Years but Not Exceeding Five Years:
• Open Plots: 5%
• Constructed Property: 0%
• Flats: 0%
6. Holding Period Exceeding Five Years but Not Exceeding Six Years:
• Open Plots: 2.5%
• Constructed Property: N/A
• Flats: N/A
7. Holding Period Exceeding Six Years:
• Open Plots: 0%
• Constructed Property: N/A
• Flats: N/A
The new tax structure is designed to discourage short-term property speculation and encourage long-term investment. By imposing higher tax rates on gains from properties held for shorter durations, the government aims to create a more stable and sustainable real estate market.
This move is part of broader fiscal measures introduced in the budget to enhance revenue streams and address economic challenges. While it may impact property transactions in the short term, the long-term objective is to promote a healthier and more balanced property market in Pakistan. As stakeholders adapt to these changes, the government will closely monitor their impact on the real estate sector and overall economic dynamics.
