With the implementation of the Finance Act 2023 from July 1, 2023, significant amendments have been made to the provisions related to deemed income.
Experts from KPMG Taseer Hadi & Co have analyzed these changes and provided valuable insights into their implications.
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Under the Finance Act 2022, a tax rate of 20 percent was imposed on the deemed rental income of resident individuals for the tax year 2022 and subsequent years. This deemed rental income is calculated as 5% of the fair market value (FMV) of the capital asset located in Pakistan, held on the last day of the tax year. However, certain exemptions apply to this provision, and it does not apply to the following:
• One capital asset owned by the resident individual.
• Self-owned business premises from which the individual operates a business and is listed on the Active Taxpayers List (ATL) at any time during the year.
• Self-owned agricultural land where agriculture activities are conducted, excluding farmhouses and related land.
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• Capital assets allocated to individuals or their dependents who are shaheeds (martyrs) belonging to the Pakistan Armed Forces, individuals who die while in the service of the armed forces or the federal or provincial government, war-wounded individuals in the service of the armed forces or the government, and ex-servicemen and serving personnel of the armed forces or federal and provincial governments who are original allottees of the capital asset, as certified by the allotment authority.
• Any property from which income is taxable under the Income Tax Ordinance and tax has been paid on it.
• Capital assets acquired in the first tax year where tax has been paid under Section 236K.
• Capital assets whose aggregate fair market value, excluding the assets mentioned above, does not exceed twenty-five million Rupees.
• Capital assets owned by provincial or local governments.
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• Capital assets owned by local authorities, development authorities, builders, and developers for land development and construction, provided that they are registered with the Directorate General of Designated Non-Financial Businesses and Professions.
The recent amendment in the Act has added a proviso to Section 7E of the Income Tax Ordinance, 2001. According to this proviso, inactive taxpayers falling under the following categories will no longer be eligible for exclusion from tax liability:
• One capital asset owned by a resident individual.
• Any property from which income is taxable under the Income Tax Ordinance, and tax has been paid on it.
• Capital assets acquired in the first tax year where tax has been paid under Section 236K.
• Capital assets whose aggregate fair market value, excluding the assets mentioned therein, does not exceed Rs 25 million.
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However, the above proviso does not apply to individuals who are not required to file a return of total income as per the tenth schedule to the Income Tax Ordinance, 2001.
These changes to deemed property income have significant implications for taxpayers in Pakistan. It is crucial for individuals to consult with tax experts and stay updated with the latest regulations to ensure compliance with the amended provisions.
