Proposed taxes on the real estate sector in Finance Bill 2024

The Government has tabled the Finance Bill and proposed multiple changes to the taxation structure for the real estate sector in Pakistan. A new excise duty has been proposed which was not there in the previous budget. The tax rate on capital gains that varied with the holding period has been removed for properties acquired after 1 July 2024; a flat capital gains tax shall apply to the disposal of land. Apart from the previous categories of filers, non-filers, and filers appearing on the Active Tax Payers List (ATL), a new distinction is proposed to be created by the name of “late filers”.

Based on the proposed budget tabled by the Finance Minister in Parliament, the following taxes are expected to affect transactions in the real estate sector in the Province of Punjab.

A. Deemed Income: Section 7E of Income Tax Ordinance 2001

  • This tax applies from tax year 2022 and onwards
  • This tax is calculated on deemed income from ownership of land (irrespective of whether it generates income or not)
  • As a resident person, you are deemed to derive an income at 5% of the fair market value of the land
  • Such deemed income shall be taxed at 20% of your deemed income each year
  • This tax does not apply to land owned by “builders and developers for land development and construction” provided that these entities are “registered with Directorate General of Designated Non-Financial Businesses and Professions”.
  • A housing society is obligated not to register a transfer in its records unless the seller has provided proof that it has discharged its obligation under this section

B. Capital Gains Tax: Section 37(1A) of Income Tax Ordinance 2001

  • This tax deals with capital gains on the disposal of land
  • Previously, capital gains varied depending on the holding period of the land. This is now proposed to be changed in the Finance Bill 2024 with a distinction being drawn between those properties acquired on or before 30 June 2024 and those acquired on or after 1 July 2024:

Property acquired on or after 1 July 2024: 15% flat capital gains will apply on disposal of land acquired on or after 1 July 2024 for persons appearing on the Active Taxpayer’s List but please note that different rates will apply to people who do not appear on this list and they will be charged on the basis of normal income tax rates

Property acquired on or before 30 June 2024: the capitals gain will vary depending on the holding period:

      • Where holding period does not exceed 1 year, 15% capital gains will apply
      • Where holding period exceeds 1 year but not 2 years, 12.5% capitals gains will apply on open plots, 10% on constructed property and 7.5% on flats
      • Where holding period exceeds 2 years but does not exceed 3 years, 10% capital gains will apply on open plots, 7.5% on constructed property an 0% on flats
      • Where holding period exceeds 3 years but does not exceed 4 years, 7.5% capital gains will apply on open plots, 5% on constructed property, and 0% on flats
      • Where holding period exceeds 4 years but does not exceed 5 years, 5% capital gains will apply on open plots, 0% on constructed property, and 0% on flats
      • Where holding period exceeds 5 years but does not exceed 6 years, 2.5% capital gains will apply on open plots and 0% on constructed property, and 0% on flats
      • Where holding period exceeds 6 years, no capital gains will apply

C.  Advance Tax on Seller: Section 236C of Income Tax Ordinance 2001

  • This is a form of advance tax which is payable by the seller at the time of sale according to the following slabs:
    • where gross amount of consideration received does not exceed PKR 5 crores, 3%
    • where gross amount of consideration received exceeds PKR 5 crores but not 10 crores, 3.5%
    • where gross amount of consideration received exceeds PKR 10 crores, 4%

Note: A person not appearing on the Active Tax Payers List will have to pay advance tax at a higher rate of 10% of gross amount of consideration received. Similar, a person appearing on the Active Tax Payers List but who fails to file returns on time (i.e., a late filer) will also have to pay advance tax at a higher rate of 6%, 7% or 8% depending on the value of consideration received.

  • It is adjustable and is to be collected by the housing society at the time of registering or recording a transfer
  • However, this tax does not apply to the first allottee of a plot in a housing society

D. Advance Tax on Purchaser: Section 236K of Income Tax Ordinance 2001

  • This is a form of advance tax which is payable by the purchaser at the time of purchase according to the following slabs:
    • where fair market value does not exceed PKR 5 crores, 3% of the value
    • where fair market value exceeds PKR 5 crores but not 10 crores, 3.5% of the value
    • where fair market exceeds PKR 10 crores, 4% of the value

NB: A person appearing on the Active Tax Payers List but who fails to file returns on time will also have to pay advance tax at a higher rate of 6%, 7% or 8% depending on the fair market value.

  • It is adjustable and is to be collected by the housing society at the time of registering or recording a transfer

 E. New Excise Duty: Federal Excise Act, 2005

  • A new excise duty is proposed for the allotment and transfer of commercial property and “first allotment or transfer of residential property”
  • The proposed rate of tax is 5% and is to be paid by the provider of that good or service

F. Stamp Duty: Punjab Stamp Act 1899

  • This is a provincial tax and is necessary to register a transfer
    • In urban areas, it is calculated at 1% of the value of property
    • In other areas, it is calculated at 3% of the value of property

G.  TIP Tax: Local Government

  • This is a local government tax and varies from area to are depending on whether the land falls within a District Council or Metropolitan Corporation
  • In non-Cantonment areas, TIP tax is usually calculated at 1% of the DC rate

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