Karachi, September 14, 2023 – Pakistan has taken a significant step towards curbing cash-based transactions in the real estate sector by introducing penalties for cash payments made during property purchases.
This new regulation aims to enhance transparency and combat tax evasion in property transactions.
Under this development, sources within the Federal Board of Revenue (FBR) revealed that individuals purchasing immovable property with a fair market value exceeding Rs 5 million must strictly adhere to non-cash payment methods, such as crossed cheques drawn on a bank, crossed demand drafts, crossed pay orders, or other forms of crossed banking instruments indicating a transfer of funds from one bank account to another.
Failure to comply with these payment methods will result in a penalty equivalent to five percent of the property’s value, as determined by the FBR or the provincial authority for stamp duty purposes, whichever figure is higher. This new provision falls under Section 75A of the Income Tax Ordinance, 2001, effectively amending the existing law to strengthen financial regulations surrounding property transactions.
According to Section 75A (1) of the Income Tax Ordinance, 2001, it explicitly states that:
(a) Immovable property valued at over five million Rupees, or
(b) Any other asset with a fair market value exceeding one million Rupees, must be purchased exclusively through the specified non-cash payment methods, as mentioned above. This move is an effort to encourage electronic and transparent financial transactions in property dealings.
Furthermore, Section 75A (2) of the ordinance defines the fair market value as the higher of the value notified by the Board under sub-section (4) of section 68 of the Income Tax Ordinance, 2001, or the value established by the provincial authority for stamp duty purposes. This ensures a fair and consistent valuation process for property transactions.
The consequences of non-compliance with this regulation are outlined in Section 75A (3), which states that:
(a) Assets not purchased in accordance with the specified methods shall not be eligible for any allowances under sections 22, 23, 24, and 25 of the Income Tax Ordinance, 2001.
(b) The amount paid through unauthorized means shall not be considered as a cost under section 76 of the Income Tax Ordinance, 2001, when calculating any gains from the sale of such assets.
This landmark decision reflects Pakistan’s commitment to improving financial transparency, reducing tax evasion, and aligning its real estate sector with international standards. It is expected to have a significant impact on property transactions and tax compliance throughout the country.