UPDATE (Feb. 16, 2021): Good news for non-resident Pakistanis (NRPs)! President Dr Arif Alvi has promulgated Tax Laws (Amendment) Ordinance 2021 to facilitate non-resident individuals who wish to open non-resident Pakistani Rupee Value Accounts (NRVAs). The ordinance has:
– Extended 4 percent super tax on banks indefinitely beyond the tax year 2021
– Imposed withholding tax (Rs 50,000-Rs 200,000) on different engine capacity vehicles on persons who sell locally manufactured vehicles within 90 days of delivery
– Offered tax exemptions for electric vehicles and locally manufactured mobile devices
– Directed a person responsible for attesting, registering or recording the transfer of any immovable property to collect advance tax at the rate of one percent from the seller or transferor. If the buyer or transferee is an NRP holding a Pakistan Origin Card (POC) or a National Identity Card for Overseas Pakistanis (NICOP) or a Computerized National ID Card who acquires the immovable property through a Foreign Currency Value Account (FCVA) or NRVA maintained with authorized banks in Pakistan, the tax shall be the final tax for such a buyer
UPDATE (Sept. 8, 2020): According to an amendment in the Income Tax Ordinance 2002 through the Finance Act 2020, the holding period and tax rate on CGT has been reduced on the disposal of immovable property. For your understanding, a longer holding period means that a property was not bought for the purpose of making any profits and hence it leads to lower taxes, a shorter holding period means a higher amount of CGT earned, which results in a higher tax rate. With the recent amendments, now you can hold an immovable property for no longer than 4 years and the percentages of taxable capital gain have been rationalised with reference to the holding period. The details are shared below:
- There is no difference between plots and any constructed property
- The holding period for CGT has been reduced to 4 years
- 100% of capital gains to be taxed if the holding period is less than 1 year
- 75% of the capital gains to be taxed if the holding period exceeds 1 year but is less than 2 years
- 50% of the capital gains to be taxed if the holding period exceeds 2 years but not 3 years
- 25% of the capital gains to be taxed if the holding period exceeds 3 years but not 4 years
- No CGT to be taxed after 4 years of holding period
The rate of CGT on the amount of annual gains through the disposal of immovable property has also been reduced by half and can be broken down as follows:
|Annual Gains in PKR||Rate of Tax on Value of Property Before Finance Act 2020||Rate of Tax on Value of Property After Finance Act 2020|
|Gains less than 5 million||5%||2.5%|
|Gains higher than 5 million but lower than 10 million||10%||5%|
|Gains higher than 10 million but lower than 15 million||15%||7.5%|
|Gains more than 15 million||20%||10%|
Update (Apr 21, 2020): The government of Pakistan usually charges about 5% to 20% Capital Gains Tax (CGT) when selling ready-to-move-in houses and developed plots. But with the introduction of new incentives for the construction industry due to the spread of COVID-19 disease in the country, families who want to sell their house during this period, will not have to go through the hassle of paying the Capital Gains Tax. Apart from this incentive, the sales tax is also being reduced in collaboration with the provincial government.
Plato, a Greek philosopher, said, “When there is an income tax, the just man will pay more and the unjust less on the same amount of income.” Plato was right – you can see the clever ways in which people evade taxes these days. For instance, when buying a property, the seller and the buyer both agree to show less value for the purchased property on the sales deed, just so they can pay less taxes. Withholding tax is to be paid by the buyer and Capital Gains Tax is to be paid by the seller. Now you may ask what these taxes are and how many kinds of property taxes there are in Pakistan. We will discuss all of these in great detail.
DIFFERENT TYPES OF PROPERTY TAXES IN PAKISTAN
Following are the different types of property taxes in Pakistan:
- Capital Gains Tax (CGT)
- Capital Value Tax (CVT)
- Stamp Duty
- Withholding Tax or Advance Tax
Paying property taxes is like going to the dentist. It is important although you aren’t really happy about it. However, if you are trying to find a way of not paying property taxes, you might get into deep trouble with Federal Board of Revenue. FBR receives information – every bit of detail about your income, the investments you have made and real estate transactions. In short, all kinds of details pertaining to money matters. FBR will take some time in matching up your income with the filed tax returns and if there is a disparity, they will send you a notice or they will charge you a penalty fee or they might freeze your assets.
With new policies and developments taking place, there is good news for overseas Pakistanis wanting to tap into Pakistan’s real estate market. The government has loosened the noose around those expats, who are non-filers of income tax returns. Overseas Pakistanis can now invest in the real estate sector of Pakistan with ease. Before we discuss various kinds of taxes levied on property purchase and also on sale of property, let us look at the topic in view of the current news snippets related to taxes in Pakistan.
Federal Board of Revenue (FBR) realized that there is a huge gap between “deputy commissioner (DC) rates” and market prices of the said property. Due to this gap, undocumented money circulated in the market. This resulted in tax evasion. Since DC rates were low as compared to the actual market rates, real estate transactions took place based on DC rates, while in reality the actual sum of money traded between sellers and buyers was recorded as per the market value. For instance, if a 240 sq yd plot with a DC rate of Rs 30,000, but a market value of Rs. 70,000 is sold, on paper it shows DC value, while seller gets Rs. 70,000. This difference of Rs. 40,000 is black money. Because of this, neither the government nor income tax authorities could identify the total amount of income sellers were making in real estate sector business.
BRINGING PROVINCES INTO THE TAX NET – A TAXING PROCESS
To bring those earning black money into the tax net, the government of Pakistan and FBR have revised valuation tables for properties. Abolishing DC rates, these new property valuation rates will determine the actual property value. According to FBR Valuation Tables 2019, property valuation for the real estate sector have seen an increase across 20 major cities of Pakistan. This might result in a slight dip in the real estate sector’s business, but these tax policies by FBR should continue. Although for a few days to come there will be a decline in trading activity, property prices may also see a dip. At low property prices, people belonging to the middle class sector can fulfill their dream of becoming a homeowner. For the common man, there is a light at the end of the tunnel.
INCREASE IN PROPERTY TAX COLLECTION
According to a news report published in The News on April 23, 2019, “Tax experts said the establishment of the directorate created a fear and people preferred to declare property values near to the fair market values. They said the valuations notified by the provinces are very low but due to transactions at the higher rates the property tax collection increased significantly.”
The same report further revealed Punjab is leading the race by collecting PKR 5.02 billion during the first half of the current fiscal year. Around the same time, Sindh raked in PKR 1.83 billion from July to December. Both the provinces recorded a sharp increase in the amount from the last fiscal year: while Punjab showed a 22.64 percent increase, Sindh witnessed 73.83 percent growth in tax collection. Khyber Pakhtunkhwa (KPK) and Balochistan received PKR 450 million and PKR 83 million, respectively.
WHAT IS A PROPERTY TAX?
Property tax in Pakistan is a provincial tax levied on annual rental value of the property, based on Urban Immovable Property Tax Acts of respective provinces. Tax rates are different for every province. It is either a flat rate, or a percentage of the annual rental value. Rental value does not mean that the property has to be rented out. It simply gives an assessed value by the government of how much rent would be generated, had the building been let out. For each province, rate of taxation differs depending on whether the property is rented out or self-occupied.
According to Excise, Taxation & Narcotics Control Department, Punjab, there is a 5% annual rental value that is levied as tax. Annual rental value is determined by assessing properties based on their type – residential or commercial, locality and whether it is rented or self-occupied. As per the Excise, Taxation & Narcotics Department Sindh, it doesn’t matter whether the property is rented out or not. The tax is levied at a rate of 25% of the annual rental value of the property. For a comprehensive breakdown of property taxes, you can check out our blog on understanding property tax rates in Pakistan.
KINDS OF TAX ON SALE OF PROPERTY IN PAKISTAN
When it comes to taxes on sale of property in Pakistan, there is Capital Gains Tax which needs to be paid on the gain of profits. Let’s discuss it in detail.
Capital Gains Tax (CGT)
Let us now understand what is Capital Gains Tax on property in Pakistan 2018-2019? Capital Gains Tax (CGT) is a federal tax to be paid by the seller. When the seller makes profits on selling property (capital asset), it is the profit (capital gain) which is taxed, hence the name. According to the Finance Act 2017, CGT is levied only when the property is sold within three years of its purchase. The rate of taxation is 10% for the first year, 7.5% if sold during second year and 5% if sold during the third year. These gains are to be calculated according to the fair market value, based on FBR’s valuation table. Any property held for more than three years will not make the seller liable for payment of CGT.
TYPES OF TAXES ON PROPERTY PURCHASE IN PAKISTAN
When a person decides to buy property in Pakistan, they want to know everything: do they have enough resources? Do they need to apply for a home loan? Are there certain steps to follow when applying for a home loan? Should they buy properties in Karachi? Or should they invest in plots in Lahore? How much tax is levied on property purchase? They want to weigh all their options before making this big decision. Let us discuss property purchase tax in Pakistan in greater detail.
Capital Value Tax (CVT) & Stamp Duty
Those interested in buying property, keep in mind that they have to pay quite a few taxes before becoming owners of the property. Capital Value Tax (CVT) is a provincial tax and is paid by the buyer at the time of buying property. As the name suggests, it is payable on the capital value of an acquired asset. The Capital Value Tax or CVT is levied at the rate of 2% of the recorded value according to Finance Act, 2006.
Property that is transferred as a gift, an exchange or relinquishing the rights on a property all come under Capital Value Tax. However, transfer of property between parents, spouse or any of your blood relatives either as a gift or through inheritance have been excluded. In cases where it is a gift or exchange, or where property value is not mentioned in the transaction, the value of the property is calculated according to the values determined through the valuation tables.
According to Budget 2018-19, federal government had recommended the abolition of DC rates. Recommendations had also been made to reduce the CVT and Stamp Duty to a total of 1%. Neither of these recommendations have been implemented by the provinces so far. So, currently the total of CVT and Stamp Duty for urban property still stands at a total of 5% (2% CVT and 3% Stamp Duty).
Stamp Duty is basically a tax paid on the legal document at the time of purchasing property. Under the Stamp Act 1899, Stamp Duty is levied at 3% of the DC rates of the property.
Withholding Tax (WHT) to be paid by both buyers and sellers
In addition to CVT and Stamp Duty, Withholding Tax (WHT) is of utmost importance. It is a federal tax payable by both buyers and sellers on a property deal. Few points need to be taken into consideration:
- Homebuyers have to pay 2% if they file an income tax return and 4% if they do not file tax returns.
- People who are buying property have to pay WHT, only if the property is valued more than PKR 4 million
- Sellers have to pay 1% if they are tax filers, or 2% if they are non-filers
- Withholding Tax is to be paid at the time of property deal, when you are registering the sales deed
- WHT is known to be an ‘advance tax’, which means it acts as an advance on other taxes and, hence can be adjusted into homebuyer’s tax liabilities and also against the Capital Gains Tax of the seller.
Under the Budget 2018-19, FBR rates were to be abolished, sellers would no longer have to pay Advance Tax and rates would change for buyers as well. However, to ensure that the declared values of properties are fair, the government has formed the Directorate of Immovable Property (DGIP). The plan to establish it was declared in Finance Act 2018. It will be authorized to conduct geo-mapping of plots, apartments and all kinds of housing schemes and projects. It will also determine the valuation of properties. It will also track those areas of real estate where tax evasion is a possibility – especially while collecting Withholding Taxes.
These are some of the most common property taxes in Pakistan. Through the property tax calculator you can also calculate property taxes for 2018-2019 for Sindh and Punjab from the official websites of Excise Taxation and Narcotics Control Department, Government of Sindh and Government of Punjab, respectively. These are a few updates on taxes on property purchase and also related to taxes on sale of property in Pakistan.