Karachi, August 23, 2024 – The Federal Board of Revenue (FBR) has announced the deemed income tax rates for the tax year 2024-25, a move that is expected to impact various resident taxpayers across Pakistan. The new rates, which have been outlined in the Income Tax Ordinance, 2001, updated as of June 30, 2024, come into effect under Section 7E of the Ordinance.
Understanding Deemed Income Tax
The concept of deemed income tax refers to the taxation of income that a taxpayer is considered to have earned, based on certain assumptions, rather than actual income. This provision is particularly significant in the context of assets held by taxpayers, as it seeks to broaden the tax base and ensure that individuals who own capital assets contribute fairly to the national exchequer.
Key Provisions of the New Rates
The FBR has clarified several key aspects of the deemed income tax under Section 7E:
1. Tax Imposition: Starting from the tax year 2022 and onwards, a tax is imposed at rates specified in Division VIIIC of Part-I of the First Schedule. This tax applies to the income deemed to be derived by resident individuals.
2. Deemed Income Calculation: Resident persons are considered to have derived income chargeable to tax under this section equal to five percent of the fair market value of their capital assets located in Pakistan. This calculation is based on the value of the assets held on the last day of the tax year.
3. Exclusions: Several categories of assets and individuals are excluded from this deemed income tax:
o One Capital Asset: Each resident person is allowed to exclude one capital asset from the deemed income calculation.
o Business Premises: Self-owned business premises from where active business is carried out, by individuals listed on the active taxpayers’ list at any time during the year, are excluded.
o Agricultural Land: Self-owned agricultural land used for farming activities, excluding farmhouses and annexed land, is exempt.
o Special Categories: Assets allotted to Shaheeds or dependents, individuals who die while in service, war-wounded persons, ex-servicemen, and government employees as certified by the relevant authorities are excluded.
o Income-Producing Property: Properties from which income is chargeable to tax and on which tax is duly paid are also exempt.
o New Acquisitions: Capital assets acquired in the first tax year, where tax under section 236K has been paid, are not subject to deemed income tax.
o Small Asset Holdings: If the aggregate fair market value of capital assets, excluding certain exempted categories, does not exceed PKR 25 million, these assets are not subject to deemed income tax.
o Government and Development Authorities: Assets owned by provincial or local governments, local authorities, and development authorities, as well as assets held by registered builders and developers for land development and construction, are exempt.
4. Conditions on Exclusions: Notably, exclusions under clauses (a), (e), (f), and (g) do not apply to individuals not appearing on the active taxpayers’ list, except for those covered under rule 2 of the Tenth Schedule.
5. Flexibility in Inclusion/Exclusion: The Federal Government retains the authority to include or exclude any person or property from the application of this section, providing a degree of flexibility in the implementation of these rules.
Definitions and Tax Rate
The FBR has provided specific definitions for terms used within this section to avoid ambiguities:
• Capital Asset: Generally includes all property types, except stock-in-trade, consumable stores, raw materials for business purposes, shares, securities, property eligible for depreciation or amortization, and certain movable assets.
• Farmhouse: Defined as a dwelling on a minimum area of 2000 square yards with a covered area of at least 5000 square feet used as a single dwelling unit.
The tax rate applicable under Section 7E is set at 20%.
Implications for Taxpayers
These new provisions indicate the FBR’s intent to ensure equitable taxation of income, particularly focusing on capital assets held by residents. Taxpayers are encouraged to review their asset holdings and tax statuses to ensure compliance with these new rules and to optimize their tax liabilities.
The FBR’s announcement marks a significant step in Pakistan’s ongoing efforts to enhance tax collection and ensure that all economic activities and asset holdings are properly taxed. As these regulations take effect, taxpayers should stay informed and, where necessary, seek professional advice to navigate the complexities of the new tax landscape.
