Govt’s New Tax Implementation Methods Can Change the Real Estate Sector

The government has come up with a strict decision to better implement the current taxes on the real estate sector to discourage the prevalent trend of investment on immovable properties without paying due taxes.

The proposal to introduce a high tax rate will not only generate revenues for the national kitty from the pockets of the rich and wealthy people but this will also control the hyperinflation on immovable properties that also deprives the needy families from buying a small home even in the suburbs of a metropolis.

At present, capital gain on immovable properties is separately taxed on the basis of the holding period of a property. It is proposed that income from capital gains may also be taxed under the normal tax regime at normal tax rates. It is therefore proposed that;

1. Income from capital gains on open plots is proposed to be taxed at 100% where the open plot is sold within one year and for a period of up to ten years. Income from capital gains on constructed properties is also proposed to be taxed on similar lines when sold within a period of five years.

2. In case a property is sold within one year it shall be taxed as normal income.

3. Tax shall be charged on 3/4rth of the income if the same property is sold after one year.

At present, if a purchaser of an immovable property pays 3% tax on the difference between the DC value and FBR value of the property then he is not required to explain the source of investment on the said differential amount. This is a permanent tool for whitening undeclared money which is against the international tax norms. Therefore it is proposed to withdraw the tax at the rate of 3% on the differential amount.

Withholding Tax on Immovable Property

FBR had previously introduced valuation tables of immovable properties in major cities. The rates notified by the revenue authority are still considerably lower than the actual market value.

It is therefore intended that FBR rates of immovable properties would be taken closer to about 85% of the actual market value. As the increase in FBR values of immovable property is going to increase the incidence of tax on genuine buyers and sellers, it is proposed that rate of withholding tax on the purchase of the immovable property may be reduced from 2% to 1%.

At present, withholding tax on the purchase of property is attracted only if the value of a property is more than four million rupees. There is a tendency to avoid this tax by breaking the transaction into amounts less than rupees four million whereas the actual value of the property is more than four million. In order to stop the misuse of this threshold, the withholding tax on purchase is proposed to be collected irrespective of the value of the property.

At present, there is no withholding tax on the sale of a property if the property is held for a period of more than three years. This is in line with the holding period for taxability of capital gain which is also three years. As the capital gain is to be taxed under the normal tax regime even beyond the period of three years,

It is proposed that withholding tax on the sale of a property be collected irrespective of the holding period to bring it in line with the proposed treatment of capital gains.

Purchase of Property through Banking Instrument

In order to capture the actual value of sale purchase transaction, it is proposed that persons purchasing immovable property of fair market value greater than rupees 5 million in the case of immovable property and one million or more in the case of movable property may be required to purchase through a banking instrument (pay-order or bank draft) other than a bearer cheque and a penalty at the rate of five percent of FBR value of immovable property is proposed for violation of this requirement.

Furthermore, in case of violation of this condition, no depreciation allowance shall be available and purchase price for the capital gain purpose shall also be treated as zero.

Real Estate Offers Windfall Profits To Investors

Consider this as an example that if someone had invested Rs 1 million in a plot in Karachi at the end of 2013, it would have attained a market valuation of around Rs 2.3 million in 2018 – a considerable capital gain of 129 percent in just 5 years.

Such huge capital gains, along with a steady increase in rentals and a subdued tax liability, made the real estate sector the most sought-after avenue for high net worth individuals/firms.

According to our previous report, some of the large industrial groups have preferred to invest their retained earnings in the real estate – both residential as well commercial (shopping malls and restaurants), instead of expanding their industrial base.

What’s Next?

The proposal of introducing taxes on real estate is old however it was finally presented in the latest financial bill however it will largely be opposed not only by parliamentarians of the opposition parties but from the government as well.

Even businessmen and industrialists, who made huge investments, will make hue and cry on the imposition of taxes and ultimately the government will likely revise down tax rates.

The government should give relief to genuine buyers by reducing withholding tax on the sale and purchase of the immovable properties. A threshold amount of the property amount value of Rs. 4 million should be exempted from taxes. The government should introduce mechanisms to prevent misuse of this exemption whereas the taxes should be exempted on the holding period of the property for a period of 10 years.