Karachi Tax Bar Association (KTBA) has made a compelling case for the government to abolish the tax on deemed income by proposing an amendment to the Finance Bill 2023.
In its recommendations for the budget of 2023-2024, the tax bar has argued that the current provision, Section 7E of the Income Tax Ordinance, 2001, treats a resident person as having derived an income chargeable to tax at an amount equal to five percent of the fair market value of immovable property situated in Pakistan, held on the last day of the tax year, with certain exclusions. The tax is payable at a rate of twenty percent based on the income calculated as mentioned above.
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The tax bar has suggested that this provision should either be eliminated entirely or amended in accordance with the ruling of the Lahore High Court.
They believe that the introduction of the tax on deemed income from immovable property, through Section 7E via the Finance Act of 2022, has led to significant complications and financial burdens for taxpayers. This provision imposes a tax on residents by considering their income as five percent of the fair market value of their capital assets in Pakistan, which is then subject to a tax rate of twenty percent under Division VIIIC of Part I of the First Schedule of the Ordinance.
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However, the Federal Board of Revenue (FBR) said that the current provision does provide certain exclusions to which Section 7E does not apply.
These exclusions include one capital asset owned by the resident person, self-owned business premises used for conducting business by individuals on the active taxpayer’s list, self-owned agricultural land used for agriculture activities (excluding farmhouses and annexed land), and capital assets allotted to specific categories of individuals, such as Shaheeds or their dependents, individuals who died while in service of the armed forces or the government, war wounded personnel, and original allotees certified by the allotment authority, among others.
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Additionally, properties from which income is already taxed, capital assets in the first year of acquisition where tax under section 236K has been paid, capital assets whose aggregate fair market value (excluding the assets mentioned above) does not exceed twenty-five million rupees, capital assets owned by provincial or local governments, and capital assets owned by designated non-financial businesses and professions are also excluded.
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The Karachi Tax Bar Association believes that the tax on deemed income creates unnecessary complexity and burden for taxpayers. By recommending the abolition or amendment of Section 7E, they aim to alleviate these challenges and streamline the taxation system. It remains to be seen whether the government will consider and incorporate these proposals in the upcoming Finance Bill 2023, ultimately shaping the tax landscape for the following fiscal year.
