Karachi, Pakistan – June 16, 2024 – The real estate sector in Pakistan, long considered under-taxed, is facing a tightening noose from the government.
The recently unveiled Finance Bill 2024 proposes stringent measures aimed at capturing a larger share of tax revenue from property transactions.
According to a budgetary commentary by KPMG Taseer Hadi & Co., this is not the first attempt by the government of Pakistan to bring the lucrative but largely undocumented real estate sector into the tax fold. Past efforts have included various measures to document property ownership and increase tax collection.
However, these past initiatives taken in Pakistan often resulted in a double-edged sword. Increased tax liabilities for both buyers and sellers dampened transaction volumes and property values. This, in turn, led to adjustments in property valuations and a rise in the filing of nil tax returns, a strategy employed to avoid higher advance tax rates applicable to those outside the Active Taxpayers List (ATL).
Undeterred, the Finance Bill 2024 proposes a continuation and expansion of these efforts. The key change pertains to capital gains arising from the sale of immovable property acquired on or after July 1, 2024. For individuals not included in the ATL at the time of disposal, capital gains will be taxed at the regular business income tax rates. Additionally, significantly higher advance tax rates are proposed for those who are categorized as delayed filers or non-filers.
These measures taken by Pakistan aim to achieve a two-pronged approach: further documentation of the real estate sector and encouraging the filing of accurate income tax returns. By taxing capital gains at regular income tax rates for those outside the ATL, the government hopes to incentivize individuals to register and participate in the formal tax system. Similarly, the increased advance tax burden on non-filers and late filers creates a disincentive for avoiding tax obligations.
The effectiveness of these proposed measures remains to be seen. While increased documentation and tax collection are desirable outcomes, experts caution that overly stringent measures could once again stifle transaction volumes and hinder market growth. Striking a balance between boosting tax revenue and maintaining a healthy real estate market will be a challenge for the government as the Finance Bill progresses through the legislative process.
