How do you define Tax?
Types of Taxation in Pakistan
The taxation system in Pakistan is divided into categories like Federal taxes and provisional taxes. These types are subdivided into different categories of taxes like (Income Tax except Agricultural Income Tax, Sales Tax (VAT), Federal Excise Duty, Customs Duty, Petroleum levy Pakistan) come under federal taxes and (Agricultural Income Tax, Capital Value Tax, Motor Vehicle Tax, Land Tax, Property tax, Excises on Hotels, Cinemas, Etc.) come under provisional taxes). Federal Board of Revenue handles all of these tax related matters and their objective is to increase the revenues by taxation and simplify tax laws.
Pakistan Tax Administration and Real Estate Market
Among all taxes in the country the property taxes are on the top as they play a huge role in country’s economy and input a good amount of money is invested in real estate market so it is obvious that property taxation helps the government’s financial position. Building a house now has become a big task as it is including the cost of material, labor, taxation and the overall cost of construction. A specific percentage of tax is designated for all sectors and it grows and falls as per the government’s orders. By the change in the economy of Pakistan the rate of taxes change. In the annual budget for the fiscal years 2022 and 2023, the federal government imposed new taxes on the real estate industry. In addition to raising the existing advance tax and capital gain taxes on property purchases and sales, the government has also implemented a new “Deem Tax” on unused or additional properties. Real Estate market is so vast that it is hard to manage the taxation system as more people are invested in and so they find ways to get rid of taxes and there is a large number of housing societies and projects which were fined for not paying taxes and for doing the black money market in Real estate.
Tax Dilemma in Real Estate Market
- Capital Gains Tax (CGT)
- Capital Value Tax (CVT)
- Withholding Tax (WHT)
- Stamp Duty
The stress of managing and coping up with the tax duties and revenues in Pakistan’s real estate market is a real thing and it’s scary for the investors to plan a whole budget for investing in the property and then paying the taxes. Role of government in tax on sale of property in Pakistan 2023-2024 and the unfair policies of taxation have resulted in thousands of housing societies being out of the tax net. This has resulted in an increase in black money in real estate. In just 300 property transactions, Rs13 billion was paid above the Federal Board of Revenue’s (FBR) determined property valuation rates, according to a study of three of Karachi’s largest property transaction hubs. This demonstrates the amount of black money—money that has not been taxed—circulating in the market. Despite having access to data in the form of withholding taxes, individuals who do not declare their property at market value for tax purposes have not been on the radar of the FBR. Many of these real estate agents and real estate societies collect taxes from buyers, but do not pay these taxes to the national treasury and do not file tax returns with the FBR.
Tax on sale of property in Pakistan
New impositions on property taxes in Pakistan:
- 5% tax on income of non-productive immovable properties, unutilized commercial/residential/industrial plots, and farmhouses.
- Residents with more than one immovable property priced above PKR 25 Million are liable to pay 1% of the property’s fair market value.
- Residents shall be deemed to receive a rent equal to 5% of the property’s fair market price.
For the tax year 2022, increased rates are applicable based on the gross advances to deposits ratio:
- If the ratio was less than 50%: 55% tax on property gain, 49% on property sale purchase, and 35% on income from property tax rates.
- If the ratio is less than or equal to 50%: 55% tax on property gain, 49% on property sale purchase, and 39% on income from property tax rates.
How the tax is calculated?
Long-term capital gain = Final Sale Price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where: Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.
Certainly! Let’s break down the formula and its components in simpler terms:
- Long-term capital gain: This is the profit you make when you sell an asset (like property or stocks) after owning it for a certain period of time (usually more than one year).
- Final Sale Price: The amount of money you receive when you sell the asset.
- Indexed cost of acquisition: This is the original price you paid for the asset, adjusted for inflation. It’s like looking at the past price in today’s dollars to account for the increase in prices over time.
- Indexed cost of improvement: If you spent money on improving the asset (like renovations on a property), this is the cost of those improvements adjusted for inflation.
- Cost of transfer: Any expenses you incur while transferring ownership of the asset, like legal fees or brokerage commissions.
So, in simpler terms, the long-term capital gain is the profit you make from selling an asset after considering the original purchase price adjusted for inflation, any improvements made to the asset also adjusted for inflation, and any expenses related to transferring ownership.
Key Considerations Regarding Tax Exemption
To qualify for tax exemption, consider the following criteria:
- Residential properties on land less than 5 Marlas, excluding category “A” areas.
- Properties with annual rent not exceeding Rs 4,320.
- Single-owner occupied houses with annual rent not exceeding Rs 6,480.
- Tax relief for widows, orphans, and disabled individuals with tax liabilities under Rs12,150 annually.
- Upto 1 Kanal housing benefit for retired government servants.
- Government-owned or local authority buildings.
- Mosques, religious structures, public parks, playgrounds, schools, hostels, libraries, and hospitals.
- Properties where rents are exclusively used for religious or prescribed public charitable institutions.
Gain Tax On property In Pakistan
Before they transfer the plot into their name, the property purchaser must pay withholding tax. This is the only factor that will similarly affect all three real estate sectors. The government has increased the withholding tax in Pakistan from 1% and 2% for filers and non-filers to 2% and 5%, respectively, in the 2022-23 budget. An increase in withholding tax means an increase in the transfer costs which will directly impact the real estate market.
| Plots/ Files | House property | Apartment Property |
|---|---|---|
|
CGT will apply if you sell a plot before 6 years, and are exempted after 6th year |
CGT will apply if you sell a house before 4 years, and are exempted after 4th year. |
15% CGT will apply for the first year and 20% tax from 2nd year |
Tax on rental income Pakistan
| Income taxable | Tax Liability |
|---|---|
|
Taxable income is not more than PKR 300,000 |
Pkr 0 |
|
Taxable income more than 300,000 |
5% of the amount exceeding PKR 300,000 |
|
Taxable income more than 600,000 |
PKR 15,000 +10% Of the exceeding amount |
|
Taxable income exceeding 2,000,000 |
PKR 155,000 + 25% Of the amount exceeding |
Conclusion
Tax on property in Pakistan, also known as property tax, is an important way for the government to collect money. When people sell property, they might have to pay a gain tax on the profit they make. This tax keeps the prices of properties stable. So, property tax in Pakistan is not only about paying for services but also about making sure everyone contributes to the country’s development.
For further inquiries or assistance regarding property tax in Pakistan, please don’t hesitate to contact us. To know more about tax on property in Pakistan visit Brownstone Marketing or contact here 92 331 1111045.
