The recently introduced Finance Bill 2024 brings significant alterations to Pakistan’s capital gains tax regime, applicable from July 1, 2024. Let’s delve into the key updates for both individuals and businesses.
Capital Gains on Immovable Property (Real Estate)
• Introduced in 2012, capital gains tax on real estate was previously linked to the holding period of the property. Rates varied from 2.5% to 15% with separate classifications for open plots, construction property, and flats. Properties held beyond a certain threshold enjoyed zero-rated capital gains upon disposal.
• The new regime proposes a flat rate of 15% for all immovable property acquired on or after July 1, 2024, regardless of the holding period or type of property. This applies to individuals and Associations of Persons (AOPs) whose names appear on the Active Taxpayers List (ATL) on the disposal date.
• For those not on the ATL, capital gains will be taxed at their applicable income tax slab rates, with a minimum of 15%. Non-ATL companies will be taxed at the prevailing corporate tax rate.
• The previous system with holding periods and classifications remains unchanged for properties acquired before July 1, 2024.
• A new concept of “late filers” is introduced. Individuals on the ATL who file their tax returns after the due date will face enhanced advance tax rates on real estate transactions.
Capital Gains on Listed Securities (Stocks)
• Introduced in 2010, capital gains tax on listed shares initially offered a zero-rating for securities acquired before July 1, 2013. Later, a 12.5% rate applied to those acquired between July 1, 2013, and June 30, 2022. Since then, holding period-based rates have been in place, with a maximum of 15% and a 0% rate for holdings exceeding six years.
• The new regime proposes a flat rate of 15% for all capital gains on listed securities acquired on or after July 1, 2024, regardless of the holding period. This applies to individuals and AOPs on the ATL on both acquisition and disposal dates.
• Individuals and AOPs not on the ATL on both dates will be taxed at their applicable income tax slab rates, with a minimum of 15%. Non-ATL companies will be taxed at the prevailing corporate tax rate.
• The previous system with holding periods remains unchanged for securities acquired before July 1, 2024.
Capital Gains on Mutual Funds and REITs
• The government proposes to increase the withholding tax rate on capital gains from stock funds if dividend receipts are less than capital gains. The existing rate of 12.5% will rise to 20%.
• The current exemption from capital gains tax for holding mutual funds for more than six years will be restricted to acquisitions before July 1, 2024.
• The tax rate and withholding tax on dividends from mutual funds deriving 50% or more income from “profit on debt” will be increased to 25%, up from the current 15%.
Shares of Unlisted Companies
• Introduced in February 2023, a 10% withholding tax on the fair market value of unlisted shares applies at the time of payment. The tax must be deposited within 15 days.
• The scope of this provision has been extended to cover shares of listed companies traded outside the National Clearing Company of Pakistan Limited (NCCPL) mechanism and through the Initial Public Offering (IPO) process, except where details are submitted to NCCPL for tax payment.
• For shares registered with the State Bank of Pakistan (non-residents on repatriation basis), the seller must now provide a certificate of tax payment before registration or transfer of registration.
• The advance income tax will now be applicable at the earlier of the time of payment or registration of shares by the Securities and Exchange Commission of Pakistan (SECP) or SBP. Failure to comply will incur a penalty equal to 50% of the tax amount.
Overall Impact
The revised capital gains tax regime aims to simplify the system and potentially increase tax revenue. However, it also introduces complexities, particularly for those not on the ATL and for transactions involving unlisted shares. Businesses and investors will need to adapt their strategies to comply with the new regulations.
Key Takeaways
• A flat rate of 15% is introduced for capital gains on immovable property acquired after July 1, 2024, for individuals and AOPs on the ATL.
• A flat rate of 15% is introduced for capital gains