Government Introduces Separate Tax Regime for Property Sale

Government Introduces Separate Tax Regime for Property Sale

Karachi, June 29, 2024 – The government of Pakistan has introduced a separate tax regime for income tax on property sales through the amended Finance Bill, 2024.

This new tax structure aims to streamline and specify the taxation process for income generated from property-related activities, ensuring better compliance and revenue generation.

Tax experts at Tola Associates Legal Consultants explained that the government, through the Amended Bill, has proposed the addition of a new Section 7F in the Income Tax Ordinance, 2001. This new section introduces a distinct tax regime for income derived from the following activities:

1. Construction and sale of residential, commercial, or other buildings.

2. Development and sale of residential, commercial, or other plots.

3. Activities encompassing both construction and sale of buildings as well as development and sale of plots.

Under this new regime for property, the tax is levied on the taxable profit of every individual or entity deriving income from the aforementioned activities. The taxable profit, as defined for the purposes of Section 7F, is as follows:

• Ten percent of gross receipts from the construction and sale of residential, commercial, or other buildings.

• Fifteen percent of gross receipts from the development and sale of residential, commercial, or other plots.

• Twelve percent of gross receipts from activities involving both construction and development as specified above.

An explanation has been added to clarify the application of this section on the property: Explanation: For the removal of doubt, it is clarified that the provisions of this section shall only apply to income accruing from gross receipts from the specified activities and shall not be applicable to income from any other source or under any other head of income.

The Amended Bill also proposes stipulations for taxpayers explaining the nature and source of amounts credited, investments made, money or valuable articles owned, or funds from which expenditures were made. Specifically, if a taxpayer accounts for any source of income subject to tax under this section, they are not allowed to credit any sum exceeding the taxable profit.

Proviso: If the taxable income under Section 9 exceeds the taxable profit under this section, the taxpayer is entitled to credit such taxable income, subject to the payment of tax at the rate specified in Division I or II of Part I of the First Schedule of the Ordinance.

This new tax regime is seen as a significant move to bring more clarity and fairness to the taxation process for property sales. By clearly defining the taxable profit percentages and specifying the activities under this regime, the government aims to reduce tax evasion and increase compliance among property developers and sellers.

The introduction of Section 7F is also expected to have a substantial impact on the real estate sector, influencing how developers and investors approach their financial planning and tax reporting. The clear delineation of tax obligations could encourage more transparency in property transactions, fostering a more stable and predictable business environment.

Overall, the new tax regime marks a strategic effort by the government to enhance revenue collection from the burgeoning real estate sector while promoting fairness and clarity in the tax system. As the amended Finance Bill, 2024 comes into effect, stakeholders in the property market will be closely observing its implementation and impact on their operations.