Tag: Capital Gain Tax

KARACHI: The Finance Bill 2021 has proposed various changes to Income Tax Ordinance, 2021 to capital gain tax on disposal of immovable properties.

In its commentary on budget 2021/2022, KPMG Taseer Hadi & Co. Chartered Accountants said that taxation of gain on disposal Gain on disposal of immovable property is currently taxable on separately provided slab rates by computing the such gain on the basis of holding period as envisaged under sub-sections (1A) read with (3A) of section 37.

The Finance Bill 2021 proposes to provide for taxability of gain on disposal of immovable property where such gain exceeds Rs. 5 million as normal capital gain subject to tax under applicable tax rates provided under normal slab rates or corporate tax rates.

However, benefit of holding period shall still be taken into account while computing the taxable capital gain.

Amendment has also been proposed to tax this gain at 5 percent instead of existing slab rates varying from 2.5 percent to 10 percent. Thus, the gain below Rs. 5 million computed by taking benefit of holding period shall be subject to tax @ 5 percent.

The Finance Bill also proposes to insert explanation in sub-section (1A) of section 37 that where a person purchases and sells immovable property in the ordinary course of business, such gain shall be taxable as business income and not as capital gain.

This fiction has always remained subject matter of dispute though eventually decided by the court upholding the stance of tax authorities that such gain should be taxed as business income.

Currently under section 37(4A) where a capital asset becomes the property of the person inter-alia through gift, the fair market value of the asset, on the date of its transferor acquisition by the person shall be treated to be the cost of the asset.

This historically as bestowed two-pronged benefits i.e. exempting gain on such disposal from tax in the hands of transferor and simultaneously entitling the transferee to a revalued cost to be claimed as deduction on subsequent sale.

The bill proposed that if the capital asset acquired through gift is disposed of within two years of its acquisition and the Commissioner is satisfied that this constitutes a tax avoidance scheme then the recipient of the gift shall be treated to have acquired the asset for a cost equal to the cost for the person disposing the asset i.e. the historical cost.

KARACHI: The government has taken taxation measures on capital gains from disposal of immovable properties and introduced normal tax regime on gains on immovable properties above Rs5 million.

According to commentary on budget 2021/2022 and Finance Bill, 2021 released by PwC A. F. Ferguson & Co. Chartered Accountants, under the existing provisions, gains on disposal of immovable properties are taxed at special (reduced) slab rates along with reduction in gain based on holding period.

Gains on disposal of immovable properties held for more than four years are effectively non-taxable.

The proposed amendment at the outset seeks to clarify that this regime for immovable properties is not applicable on persons habitually engaged in transaction of sale and purchase of properties or where sale is adventure in the nature of trade or business.

Income of such persons would be taxable under the head of business with consequential effect that no benefit of holding period and special rate of tax would apply.

Furthermore, it is proposed that gains up to Rs 5 million will be taxed at a special rate of 5percent as against the existing rate of 2.5 percent.

The gains exceeding Rs 5 million will be taxed at normal rate though the benefit of holding period in computation would continue to apply as per existing provisions given below:

1. Where the holding period of an immovable property does not exceed one year: the calculation for tax shall be

A = Consideration minus cost

2. Where the holding period of an immovable property exceeds one year but does not exceed two years: the calculation shall be A x 3/4

3. Where the holding period of an immovable property exceeds two years but does not exceed three years: the calculation shall be A x 1/2

4. Where the holding period of an immovable property exceeds three years but does not exceed four years: the calculation shall be A x 1/4

5. Where the holding period of an immovable property exceeds four years: the calculation shall be Zero

In case of disposal of a depreciable immovable property at a consideration higher than its cost, the provisions of law deem consideration as cost of such property, thus, resulting into recoupment of tax deprecation only.

The rationale for such provision was that the Federal Government did not have powers under the Constitution of Pakistan to tax gain on disposal of an immovable property.

However, the 18th amendment to the Constitution was construed by the Federal Government to have given them jurisdiction to tax such gains.

Consequently, specific provisions were introduced for taxation of gains on immovable properties, but no such amendment was made for depreciable immovable assets.

An amendment is now proposed to tax the aforesaid ‘excess’ as capital gains under section 37. As a result, in case of depreciable immovable assets, the excess should be dealt in the same manner as applicable for other immovable properties particularly with the concept of holding period.

The placement and language of the proposed amendment contradicts section 22(8) thus resulting in anomalous situation, which should be reconsidered.