Karachi, August 23, 2023 – The Federal Board of Revenue (FBR) in Pakistan has recently issued an updated version of the Income Tax Ordinance, 2001, shedding light on how to determine income from property in the country.
(more…)Tag: income from property
-
Understanding the Basics of Income from Property under Pakistan Tax Laws
Income tax is an important source of revenue for any country, and Pakistan is no exception. The Income Tax Ordinance, 2001, is the main legislation governing the taxation of income in Pakistan.
(more…) -
Uniform taxation for property income introduced
KARACHI: A major shift in taxation on property income has been introduced through Finance Bill, 2021 and all taxpayers shall be subject to uniform taxation on net-income basis at the applicable rates.
According to commentary on budget 2021/2022 and Finance Bill, 2021, by PwC A. F. Ferguson & Co. Chartered Accountants, at present, Individuals and Association of Persons (AOPs) can opt for their property income to be chargeable to tax on gross rent without any deductions, at specified (lower) tax rates.
Companies’ property income, however, is subject to tax after certain admissible deductions at applicable corporate rate.
Through the proposed amendments, property income for all taxpayers shall henceforth be subject to uniform taxation on net-income basis at the applicable rates.
Withholding tax rates applicable to the property income of Individuals and AOPs are also proposed to be revised as under:
1. Where the gross amount of rent does not exceed Rs300,000: No tax shall be levied
2. Where the gross amount of rent exceeds Rs. 300,000 but does not exceed Rs. 600,000: the tax shall be 5 per cent of the gross amount exceeding Rs. 300,000
3. Where the gross amount of rent exceeds Rs. 600,000 but does not exceed Rs. 2,000,000: the tax shall be Rs15,000 plus 10 per cent of the gross amount exceeding Rs. 600,000
4. Where the gross amount of rent exceeds Rs. 2,000,000: the tax shall be Rs155,000 plus 25 per cent of the gross amount exceeding Rs. 2,000,000.
Further, the adjustment of property income for a tax year against loss under any other head of income is proposed to be reinstated.
The adjustment of such losses could give rise to a situation where effectively no tax is payable on property income.
In order to give full effect to this amendment, the Government may, therefore, consider introducing enabling provision for issuance of exemption / reduced rate certificates in eligible cases.
-
Adjustment of expenses allowed against property income
ISLAMABAD: The Federal Board of Revenue (FBR) has said that adjustment of expenses on property income has been allowed if a taxpayer opted to pay income tax under the head of individual income.
Sources in FBR said that through Finance Act, 2016, a dual tax treatment was introduced for property income of individuals/A0Ps and companies.
Individuals and AOPs had to pay fixed amount of tax on gross rentals at the rates specified in Division VIA of Part-I of First Schedule.
However, certain deductions were allowable for computing property income in case of a company.
A new sub-section (7) was added to Section 15A through Finance Act, 2019 to enable Individuals/A0Ps to opt for normal tax regime and claim deductions against gross rentals as provided in the law.
But that option was available only to those individuals and AOPs who derived income from property in excess of Rs.4 million.
The Finance Act, 2020 has removed this condition by making amendment in sub-section 7 of section 15A.
Now all individuals/A0Ps are allowed to claim deductions against gross rental income if they opt to pay tax at rates given in Divisions I of Part-I of First schedule to the Ordinance.
Furthermore, deduction in respect of administration and collection charges under clause (h) of Section 15A has been reduced from 6% to 4% of the rent chargeable to tax.
-
Reduction in rental income expense limit to encourage under-reporting
Presently, expenses incurred to the extent of 6 percent of rent chargeable wholly and exclusively for deriving rent are admissible as deduction against rental income.
The Bill proposed to reduce the limit from 6 percent to 2 percent.
The experts said that further reducing such limit would deprive a taxpayer for claiming a legitimate expense incurred solely for deriving taxable income and would ultimately lead to higher tax payable by the taxpayer. “It may encourage taxpayers to under-report their taxable income on the grounds that their legitimate expenses are disallowed,” experts at Deloitte Yousuf Adil Chartered Accountants said.
Presently, income from property derived by an individual or an Association of Persons is subject to tax at the specified slab rates and treated as a separate block of income.
However, individuals or AOPs whose income from property exceeds Rs 4 million per annum can opt to claim deductions under section 15A of the Ordinance and pay tax at normal rates specified in Division I of Part I of the First Schedule.
The Bill proposed to abolish such limit of Rs. 4 million and therefore an individual or AOP can now opt for claiming tax deductions and pay tax at normal rates irrespective of amount of income derived from property.
-
Tax amendments to property income introduced
ISLAMABAD: Finance Bill, 2020 has proposed many changes to taxation of property income for tax year 2021.
According to commentary of PWC A. F. Ferguson Chartered Accountants, prior to amendments made through Finance Act, 2019, rental income of non-corporate persons was taxed on a presumptive basis not allowing any deductions and allowances.
The Finance Act, 2019 introduced an option for non-corporate persons deriving rental income exceeding Rs 4 million for taxation on net income basis at the applicable rate.
The ceiling of Rs. 4 million for entitling this regime is now proposed to be done away.
As a result, all non-corporate persons with rental income can now opt to be taxed at par with corporate persons.
In case rental income is computed on net income basis, certain specific deductions are allowed, such as repair allowance, financial charges, insurance premium, local taxes, etc.
In addition to these specific deductions, all other expenditure wholly and exclusive incurred for the purpose of rental income including administration and collection chares, etc. is allowed subject to a threshold of 6 percent of gross rentals.
The threshold of 6 percent is now proposed to be reduced to 2 percent.
-
Three new slabs added for taxation on income from property
ISLAMABAD: Three additional slabs have been added to income from property in order to generate more revenue under this head, sources in Federal Board of Revenue (FBR) said on Friday.
They said that in the last budget 2019/2020, effective from July 01, 2019, three additional slabs have been added to income from property in order to generate more revenue.
Prior to the amendment there were five taxable slabs of income from property with the highest slab’s rate being Rs. 200,000/- plus 20 percent of income exceeding Rs2000,000.
After the amendment said slab has been limited from Rs 2000,000/- to 4,000,000/- and thereafter three additional brackets of income between four to six million, six to eight million and exceeding eight million have been added.
The updated table of tax on income from property is as under:
S.No. Gross amount of rent Rate of tax (1) (2) (3) 1. Where the gross amount of rent does not exceed Rs.200,000. Nil 2. Where the gross amount of rent exceeds Rs.200,000 but does not exceed Rs.600,000. 5 per cent of the gross amount exceeding Rs.200,000. 3. Where the gross amount of rent exceeds Rs.600,000 but does not exceed Rs.1,000,000. Rs.20,000 plus 10 per cent of the gross amount exceeding Rs.600,000. 4. Where the gross amount of rent exceeds Rs.1,000,000 but does not exceed Rs.2,000,000. Rs.60,000 plus 15 per cent of the gross amount exceeding Rs.1,000,000. 5. Where the gross amount of rent exceeds Rs.2,000,000 but not exceed Rs. 4000,000 Rs.210,000 plus 20 per cent of the gross amount exceeding Rs.2,000,000” 6. Where the gross amount of rent exceeds Rs.4,000,000 but does not exceed Rs.6,000,000. Rs.610,000 plus 25 per cent of the gross amount exceeding Rs.4,000,000. 7. Where the gross amount of rent exceeds Rs.6,000,000 but does not exceed Rs.8,000,000. Rs.1,110,000 plus 30 per cent of the gross amount exceeding Rs.6,000,000. 8. Where the gross amount of rent exceeds Rs.8,000,000. Rs.1,710,000 plus 35 per cent of the gross amou (b) The rate of tax to be deducted under section 155, in the case of company shall be 15 percent of the gross amount of rent.
The chargeability of tax on income from property has been explained in Section 155 of Income Tax Ordinance, 2001.
Section 155. Income from property.— (1) Every prescribed person making a payment in full or part (including a payment by way of advance) to any person on account of rent of immovable property (including rent of furniture and fixtures, and amounts for services relating to such property) shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule.
Explanation.- “gross amount of rent” includes the amount referred to in sub-section (1) or (3) of section 16, if any.
(3) In this section, “prescribed person” means –
(i) the Federal Government;
(ii) a Provincial Government;
(iii) Local Government;
(iv) a company;
(v) a non-profit organization or a charitable institution;
(vi) a diplomatic mission of a foreign state;
(via) a private educational institution, a boutique, a beauty parlour, a hospital, a clinic or a maternity home;
(vib) individuals or association of persons paying gross rent of rupees one and a half million and above in a year; or
(vii) any other person notified by the Board for the purpose of this section.
-
FBR explains chargeability of tax on income from property
KARACHI: The rent received or receivable by a person during a tax year is chargeable to tax under head of income from property.
The FBR issued Income Tax Ordinance, 2001 updated June 30, 2019 and explained the taxability on income from property under Section 15.
Section 15: Income from property
Sub-Section (1): The rent received or receivable by a person for a tax year, other than rent exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Income from Property”.
Sub-Section (2): Subject to sub-section (3), “rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building.
Sub-Section (3): This section shall not apply to any rent received or receivable by any person in respect of the lease of a building together with plant and machinery and such rent shall be chargeable to tax under the head “Income from Other Sources”.
Sub-Section (3A): Where any amount is included in rent received or receivable by any person for the provision of amenities, utilities or any other service connected with the renting of the building, such amount shall be chargeable to tax under the head “Income from Other Sources”.
Sub-Section (4): Subject to sub-section (5), where the rent received or receivable by a person is less than the fair market rent for the property, the person shall be treated as having derived the fair market rent for the period the property is let on rent in the tax year.
Sub-Section (5): Sub-section (4) shall not apply where the fair market rent is included in the income of the lessee chargeable to tax under the head “Salary”.
Sub-Section (6): Income under this section derived by an individual or an association of persons shall be liable to tax at the rate specified in Division VIA of Part I of the First Schedule.
Sub-Section (7): The provisions of sub-section (1), shall not apply in respect of an individual or association of persons who derive income chargeable to tax under this section not exceeding two hundred thousand rupees in a tax year and does not derive taxable income under any other head.
Section 15A: Deductions in computing income chargeable under the head “Income from Property”
Sub-Section (1): In computing the income of a company chargeable to tax under the head “Income from Property” for a tax year, a deduction shall be allowed for the following expenditures or allowances, namely:-
(a) In respect of repairs to a building, an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year, computed before any deduction allowed under this section;
(b) any premium paid or payable by the company in the year to insure the building against the risk of damage or destruction;
(c) any local rate, tax, charge or cess in respect of the property or the rent from the property paid or payable by the company to any local authority or government in the year, not being any tax payable under this Ordinance;
(d) any ground rent paid or payable by the company in the year in respect of the property;
(e) any profit paid or payable by the company in the year on any money borrowed including by way of mortgage, to acquire, construct, renovate, extend or reconstruct the property;
(f) where the property has been acquired, constructed, renovated, extended, or reconstructed by the company with capital contributed by the House Building Finance Corporation or a scheduled bank under a scheme of investment in property on the basis of sharing the rent made by the Corporation or bank, the share in rent and share towards appreciation in the value of property (excluding the return of capital, if any) from the property paid or payable by the company to the said Corporation or the bank in the year under that scheme;
(g) where the property is subject to mortgage or other capital charge, the amount of profit or interest paid on such mortgage or charge;
(h) any expenditure, not exceeding six per cent of the rent chargeable to tax in respect of the property for the year computed before any deduction allowed under this section, paid or payable by the company in the year wholly and exclusively for the purpose of deriving rent chargeable to tax under the head, “Income from Property” including administration and collection charges;”
(i) any expenditure paid or payable by the company in the tax year for legal services acquired to defend the company’s title to the property or any suit connected with the property in a court; and
(j) where there are reasonable grounds for believing that any unpaid rent in respect of the property is irrecoverable, an allowance equal to the unpaid rent where—
(i) the tenancy was bona fide, the defaulting tenant has vacated the property or steps have been taken to compel the tenant to vacate the property and the defaulting tenant is not in occupation of any other property of the company;
(ii) the company has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or has reasonable grounds to believe that legal proceedings would be useless; and
(iii) the unpaid rent has been included in the income of the company chargeable to tax under the head “Income from Property” for the tax year in which the rent was due and tax has been duly paid on such income.
Sub-Section (2): Where any unpaid rent allowed as a deduction under clause (j) of sub-section (1) is wholly or partly recovered, the amount recovered shall be chargeable to tax in the tax year in which it is recovered.
Sub-Section (3): Where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to tax under the head “Income from Property” and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head “Income from Property” in the first tax year following the end of the three years.
Sub-Section (4): Where an unpaid liability is chargeable to tax as a result of the application of sub-section (3) and the person subsequently pays the liability or a part of the liability, the person shall be allowed a deduction for the amount paid in the tax year in which the payment is made.
Sub-Section (5): Any expenditure allowed to a person under this section as a deduction shall not be allowed as a deduction in computing the income of the person chargeable to tax under any other head of income.
Sub-Section (6): The provisions of section 21 shall apply in determining the deductions allowed to a person under this section in the same manner as they apply in determining the deductions allowed in computing the income of a person chargeable to tax under the head “Income from Business”.
Sub-Section (7): Notwithstanding sub-section (6) of section 15, the provisions of this section shall apply to an individual or an association of persons deriving income exceeding Rs. 4 million under section 15, who opts to pay tax at the rate specified in Division I of Part I of the First Schedule.