Tax on deemed income from unused property introduced

ISLAMABAD/ KARACHI: The FBR has proposed Rs153 billion taxes on immovable property/assets within the country and offshore assets through Finance Bill 2022. The tax on deemed income from an unused property above Rs25 million, including luxury farmhouses, has been proposed. It will fetch Rs30 billion on a per annum basis.

Read full budget speech here. 

The FBR has increased the Capital Gains Tax on immovable property by non-filers from 2 to 5 percent, which will help it collect Rs40 billion in the next fiscal. The increase in the rate from one percent to two percent on sale and purchase of property for tax-filers will bring an additional revenue of Rs45 billion in the next fiscal starting from July 1, 2022.

The Capital Value Tax at a rate of one percent on foreign immovable properties of Pakistani residents will fetch an additional revenue of Rs8 billion. The Capital Value Tax at a rate of one percent on the liquid foreign assets of Pakistanis will fetch Rs10 billion.

The FBR has also imposed two percent tax on earners of above Rs300 million per annum and this one measure can help it collect Rs38 billion. Builders say the steps taken in the budget 2022-23 will prove to be detrimental for the construction sector as it would not remain attractive for people to invest in the sector.

Former Chairman Association of Builders and Developers (ABAD) Fayyaz Ilyas said that the previous government was very supportive of the sector and therefore jobs were created. The higher taxation would discourage investments, therefore, he feared 50 percent reduced activity of the sector. He said many jobs will be lost because of this.

In the budget 2022-23, advance income tax on the transaction of real-estate has been increased from 1 percent to 2 percent for filers and 5 percent for non-filers. Immovable property worth more than Rs25 million will be taxed at 1 percent of the fair market value or 20 percent of deemed rental income. Personal residence would be exempted from this tax.

Meanwhile, capital gain tax on the property for a holding period of 1 year to be charged at 15 percent. It would reduce to 0 percent after year 6 with gradual decrease of 2.5 percent each year. Previously, it started with 10 percent to zero in four years.

Another former ABAD Chairman Hasan Bakshi said that the government has not taken any steps to support the construction sector in the budget 2022-23 as the price of steel and cement was going over the roof. “The regulatory duty of steel import was imposed to safeguard the local steel bars manufacturing industry as the prices of steel bars in the international market fell from $600 per tonne to $225 per tonne in the year 2016-17. As in the preceding year, the price of steel bars rose exponentially and are presently around $750 per tonne. Still the regulation has not been withdrawn thereby giving undue protection to local steel manufacturing cartels,” said Bakshi.

Finance Minister Miftah Ismail has been saying that property holders must be the ones paying more taxes, however the apparent increase in taxes on property holders has not been significant.

Tax expert Zeeshan Merchant said that the taxation on the real estate was not significant that desired results – that is to discourage investors and instead people buy property to live and stop parking of ill-gotten money in the sector – couldn’t be achieved.

“The increase in property taxes is just a standard increase,” said Karachi tax Bar Association (KTBA) President Zeeshan Merchant. “It may not make investors divest from the sector where most of the ill-earned money gets parked.”

Read full budget speech here. 

The finance minister has been critical of property holders in the past and said that they have not been paying the amount of taxes they should ideally be paying and Pakistan is in a crisis because of that. He said that in an event in Islamabad that property holders in the country paid only Rs. 500 billion in annual taxes while common people paid Rs. 3,500 billion as indirect taxes.

“It’s only a 5 percent increase (10 percent to 15 percent). Meanwhile, a negligible tax on extra property that has been kept for investment purposes would have little impact on investors,” Merchant said.

He cited an example that an investor having a property of Rs10 million would eventually be paying Rs500,000 in a year when property rates would be going up in millions of rupees. Miftah Ismail in the budget speech has said that they have taken these steps to discourage investment in property and encourage vertical construction.