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New Property Taxes on Pakistan Real Estate Sector 2016-2017

In the annual budget revision 2016-17, property taxes were amended. These changes in the real estate property taxes were approved by the parliament. However, the same amendments were rejected by real estate stakeholders.

To solve this argument, the FBR, government, and real estate stakeholders planned to negotiate and settle down the property taxes in Pakistan. It took real estate owners, government, FBR’s weeks of discussion to resolve the issue of property taxes and valuation.

Property Taxes Post Contains

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President of Pakistan Mamnoon Hussain passed the amendments. The pending registry and real estate activities of properties will resume from Monday 1 August 2016 according to the new rate sheet. The property tax amendments according to the new rates are:

Property Tax Rates in Pakistan | Finance Act 2016-17

2 to 10 times increase in property rates as determined by Federal Board of Revenue.

The rates of real estate properties in Pakistan were stamped by the commissioner and property taxes were set up as per the DC Rates. However, according to Finance Act 2016, new changes have been imposed. The properties will now be evaluated by FBR. Now all property taxes will be according to new property rates sentenced by FBR. From current DC rates all concerned parties have agreed to increase 2-10 times the property rates. Moreover, the parties have agreed to bring rates closer to market value. Capital Gain Tax (CGT), Capital Value Tax (CVT), Stamp Duty (SD), and Withholding TAX (WHT) will be summed up as per the new rates declared by FBR.

Capital Value Tax (CVT) and (Stamp Duty (SD) is born by the buyer of immovable property only at the time of registration – provincial governments collect these taxes.

Withholding Tax (WHT)

The Federal Board of Revenue has increased the WHT threshold. The new policy of withholding tax (WHT) will only be applicable on projects worth PKR 4 million or above.

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Withholding Tax for Buyers of Immovable Property

For non-filers, 4% WHT on purchase of property

For filers, 2% WHT on purchase of property

WITHHOLDING TAX FOR SELLERS OF IMMOVABLE PROPERTY

For filers, 1% WHT on sale of property

0% WHT on sale of properties after 5 years of purchase

For non-filers, 2% WHT on sale of property

Capital Gain Tax (CGT)

BEFORE 1st OF JULY 2016 – CGT PROPERTY TRANSACTIONS

5% CGT is applicable to past transactions and on all properties sold out within 3 years and purchased before 1 July 2016.

After 1 July 2016 – CGT on Property Transactions

After 3 years of holding period 0% CGT on sale of properties

Within 1 year of purchase 10% CGT on sale of properties

Within 3 years of purchase 5% CGT on sale of properties

Within 2 years of purchase 7.5% CGT on sale of properties

For the government employees 50% tax relaxation

0% CGT to be paid by the relatives who have issued plots of the Martyrs.

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CGT CALCULATOR

Capital Gain = Price of property at the time of sale – Price of property at the time of purchase

Profit on sale of immovable property = Capital Gain

Capital Gain on property purchased for 20 LAC sold for 100 Lac (Sold Value as per FBR or new rates & Purchase value as per DC Rates)

Tax on property profit = Capital Gain Tax = CGT

Capital Gain = 100-20 = 80 Lac Profit

On profit of 80 Lac- According to new CGT calculations

Within 3 years of purchase 5% CGT on sale of property = 4 Lac

Within 2 years of purchase 7.5% CGT on sale of property = 6 Lac

Within 1 year of purchase 10% CGT on sale of property = 8 Lac

After year of purchase 0% CGT on sale of property = 0

Note that property price is not what the market value says but the prices fixated by FBR. According to 35-50% of the fair value of property, FBR will start taxing real estate transactions. But in future, all taxes will be collected according to the FAIR MARKET VALUE.

Tax on Rental Income

No tax is to be given on rental income according to Pakistan real estate tax 2016 if the total amount is less than PKR 2 Lac per year and the landlord has no income source other than the rental income. The rental income of PKR 200,000 or above is to be taxed.

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Tax on Rental Income

Annual rental above 20 Lac = 20% of the gross / amount PKR 210,000

Annual rental 10-20 Lac = 15% of the gross amount / PKR 60,000 plus

Annual rental 6-10 Lac = 10% of the gross amount / PKR 20,000

Annual rental income 2-6 Lac = 5% of the gross amount

Tax to be Paid by Builders & Developers

As per the new property tax law in Pakistan, taxation is also applicable on the incomes of developers and builders. These taxes will be collected from developers as per the location and their fixed rates. The builders have to pay tax according to the city area and per foot rate for residential and commercial properties.

A Disadvantage to Investors and Real Estate Agents

Due to the new property taxes that will be applicable from 1 July 2016. Due to this budget real estate activities had come to a full stop and even the confirmed deals have been canceled and people are hesitating to engage in trading the properties. Due to high CGT on selling the properties within 1 year of purchase, people will keep the properties on hold for longer time period and that will reduce the real estate scope. Thus, this will affect the income of real estate agents severely as they look forward to high property transactions. As expected, investors are withdrawing their investments as there is no more gain left is left in this sector.

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An Absolute Advantage to Home Buyers

Due to the application of new property taxes, property prices are on a steady decrease in many areas. The empty plots and the areas where such empty plots are in abundance, the speculation is on a rise. As per the source information, investors are taking out their money to invest it in other sectors like Pakistan Stock Exchange, which is more attractive being one of the top 10 best-performing stock exchanges of the world. This is the ultimate reason of sudden decrease in property prices and the perking interest of genuine home buyers. The buyers will be able to purchase properties at really low rates.

Positive and Negative Aspects of New Property Taxes in Pakistan

There are both negative and positive effects on the real estate sector due to the amendments in property tax system.  On the positive side, black money will come under surveillance and real estate sector will pay for the national revenue. On the negative side, real estate sector will see the really low purchase as investments will flow to other sectors.

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