Finance Bill 2021: tax treatment of capital gain on disposal of immovable properties

Finance Bill 2021: tax treatment of capital gain on disposal of immovable properties

KARACHI: The Finance Bill 2021 has proposed various changes to Income Tax Ordinance, 2021 to capital gain tax on disposal of immovable properties.

In its commentary on budget 2021/2022, KPMG Taseer Hadi & Co. Chartered Accountants said that taxation of gain on disposal Gain on disposal of immovable property is currently taxable on separately provided slab rates by computing the such gain on the basis of holding period as envisaged under sub-sections (1A) read with (3A) of section 37.

The Finance Bill 2021 proposes to provide for taxability of gain on disposal of immovable property where such gain exceeds Rs. 5 million as normal capital gain subject to tax under applicable tax rates provided under normal slab rates or corporate tax rates.

However, benefit of holding period shall still be taken into account while computing the taxable capital gain.

Amendment has also been proposed to tax this gain at 5 percent instead of existing slab rates varying from 2.5 percent to 10 percent. Thus, the gain below Rs. 5 million computed by taking benefit of holding period shall be subject to tax @ 5 percent.

The Finance Bill also proposes to insert explanation in sub-section (1A) of section 37 that where a person purchases and sells immovable property in the ordinary course of business, such gain shall be taxable as business income and not as capital gain.

This fiction has always remained subject matter of dispute though eventually decided by the court upholding the stance of tax authorities that such gain should be taxed as business income.

Currently under section 37(4A) where a capital asset becomes the property of the person inter-alia through gift, the fair market value of the asset, on the date of its transferor acquisition by the person shall be treated to be the cost of the asset.

This historically as bestowed two-pronged benefits i.e. exempting gain on such disposal from tax in the hands of transferor and simultaneously entitling the transferee to a revalued cost to be claimed as deduction on subsequent sale.

The bill proposed that if the capital asset acquired through gift is disposed of within two years of its acquisition and the Commissioner is satisfied that this constitutes a tax avoidance scheme then the recipient of the gift shall be treated to have acquired the asset for a cost equal to the cost for the person disposing the asset i.e. the historical cost.

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