Taxes and Real Estate in Pakistan - Brown Stone Marketing

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How do you define Tax?

Tax is a mandatory amount of money to be paid by residents of a state to its official Government or whoever runs the country. Tax is paid to cover the cost of general government services and goods like the services of making roads, schools and providing social services etc. It’s a revenue for state which they impose later for the betterment of society and their well-being. It is imposed on individuals or entities by governments. It’s the most common and long-term source of governmental revenue. The purpose of taxation is to raise the revenues to meet public spending and manage the most governmental activities. Economic development and Price stability are the two most important reasons for the implementation of taxes in every sector.

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 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

The developing countries like Pakistan are affected by every little change in economy and they struggle a lot in processing and growth. In ideal circumstances, the revenue generated by property taxes ought to contribute at least one percent to GDP in developing nations. The property taxes themselves are divided into 4 categories in Pakistan

The stress of managing and coping up with the tax duties and revenues in Pakistan’s real estate market Is a real thing and its scary for the investors to plan a whole budget for investing in the property and then paying the taxes. Role of government for real estate sector and the unfair policies of taxation has resulted in thousands of housing societies being out of the tax net .This has resulted in causing 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

According to FBR, the new impositions on taxation will be 5% tax on income of non-productive immovable as well as un-utilized commercial/residential/industrial plots and farmhouses. Residents who have more than one immovable property priced above PKR 25 Million and situated in Pakistan shall be liable to pay 1% of the immovable property’s fair market value and shall be deemed to receive a rent equal to 5% of the immovable property’s fair market price. For the tax year 2022, the increased rates are 55%, 49%, and 35%, respectively, if the gross advances to deposits ratio was less than 50%, 40%, or 50%. If the gross advances to deposits ratio is less than or equal to 50%, the tax rates for the tax year 2023 and subsequent years will be 55%, 49%, and 39%, respectively.

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

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 from 1% and 2% for filers and non-filers to 2% and 5%, respectively, in the 2022-23 budget. With an increase in withholding tax means an increase in the transfer costs which will impact in real estate market directly.

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

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