PkRevenue.com – The Federal Board of Revenue (FBR) is contemplating a comprehensive overhaul of the taxation system related to property transactions.
As part of the preparations for the 2024-25 budget, the FBR is evaluating various proposals aimed at bringing the real estate sector more fully into the tax net. These proposals include raising tax rates for sellers and purchasers, irrespective of whether they are filers or non-filers, and applying gains tax regardless of the holding period.
Proposed Taxation Rates
In response to demands for progressive taxation from the International Monetary Fund (IMF), the FBR is considering new taxation rates. These would impose a 3% tax on property transactions up to Rs 50 million, 4% on transactions up to Rs 70 million, and 7% on transactions up to Rs 100 million, as per Section 236C for sellers. This change is part of a broader effort to increase tax revenue from property transactions, which have historically been under-taxed.
Integration of Capital Gains into Income
The FBR is also exploring the integration of capital gains from property transactions into the overall income of individuals and corporations. For individuals, these gains would be categorized under ‘Income from property,’ while for corporations, they would fall under ‘Income from a business.’ Additionally, the FBR is proposing to repeal the capital gains exemption for industrial undertakings in Special Export Zones, as stipulated in Clause (126D) of Part-I of the Second Schedule of the Income Tax Ordinance, 2001.
Revision of Valuation Tables
Another significant proposal under consideration involves revising the valuation tables for real estate in various cities. This adjustment aims to narrow the gap between market values and the FBR’s notified valuation rates. Although the FBR has already conducted an exercise to revise these tables, the changes have not yet been officially notified. The revised tables are expected to be implemented at the start of the next fiscal year, potentially increasing the tax base and enhancing revenue collection.
Amendments to Property Definitions
The FBR is also considering changes to the definition of “personal movable property” in Section 37(1) of the Income Tax Ordinance, 2001. The proposed amendment would include any property that can be held as an investment, excluding stock-in-trade or assets that depreciate or amortize. This broader definition would ensure that more types of investment assets are subject to capital gains taxation.
Strengthening Capital Gains Taxation
To further strengthen the taxation of capital gains, the FBR plans to review the tax slabs for capital gains on real estate and listed securities. This review aims to ensure that capital gains are taxed appropriately, regardless of the duration of ownership. The FBR is also considering broadening the scope of assets subject to capital gains tax, potentially including new types of investment assets such as cryptocurrencies.
Concerns and Recommendations from Realtors
Realtors have expressed concerns about the potential impact of these changes on the real estate market. They argue that Pakistan has already seen significant capital flight, with an estimated $20 to $25 billion invested in real estate in Dubai and other locations. To avoid further capital outflow, they suggest avoiding double taxation.
Realtors also recommend that the FBR notify agreed-upon valuation tables for real estate in different cities to help increase tax collection without excessively burdening the market. They caution that if both valuation tables are revised upward and progressive tax rates for filers and non-filers are raised simultaneously, it could lead to a significant decrease in real estate transactions.
Additionally, realtors advocate for the abolition of Section 7E to reduce unnecessary tax burdens and recommend lowering the cost of transactions to 2% under Sections 236C and 236K for both sellers and purchasers. They also suggest maintaining the current holding period for Capital Gains Tax to provide stability and predictability in the market.
The FBR’s proposed overhaul of property transaction taxation represents a significant shift in Pakistan’s tax policy. By increasing tax rates, revising valuation tables, and broadening the scope of taxable assets, the FBR aims to enhance revenue collection and ensure a more equitable tax system. However, careful consideration of the potential market impacts and stakeholder concerns will be crucial to the successful implementation of these changes.
