ection 7E had its beginning in the Finance Act of 2022, which added this new provision to the Income Tax Ordinance 2001. This provision mandates that starting from the tax year 2022, every resident individual is considered to have earned income equivalent to five percent of the fair market value of their capital assets located in Pakistan. Certain exclusions for capital assets are outlined in the law. This presumed income is subject to a tax rate of 20 percent. Essentially, regardless of whether the property is rented out or not, individuals with significant real estate holdings would be liable to pay tax at a rate of 20 percent on five percent of the fair market value of their property. This five percent is treated as potential rental income. It was introduced to address tax implications related to the transfer of immovable properties.

Section 7E primarily deals with the taxation of gains from the transfer of immovable properties. When an individual or entity sells or transfers immovable property, such as land or buildings, any gains derived from such transfers may be subject to taxation under this section. In its essence, 7E typically imposes a tax on the capital gains realised from the transfer of immovable properties. The taxable gain is calculated as the difference between the sale proceeds and the cost of acquisition of the property. Thus, taxpayers involved in the transfer of immovable properties are generally required to comply with the provisions of Section 7E by accurately reporting their capital gains and paying any applicable taxes.

The impact of 7E, particularly concerning immovable property transactions, on the real estate sector in Pakistan was indeed significant and multifaceted. Changes in tax policies, such as those introduced by Section 7E, can influence market dynamics and investor sentiment. Uncertainty surrounding tax rules may contribute to volatility in property prices and affect investment decisions. Real estate transactions involve substantial capital gains, especially in urban areas where property values tend to appreciate over time. The imposition of taxes on capital gains under 7E increased the overall tax liability for buyers and sellers of real estate, potentially affecting transaction volumes and prices.

The additional tax burden resulting from 7E also influenced property prices. Sellers began to factor in the anticipated tax liability when pricing their properties, while buyers negotiated lower prices to offset the tax implications, leading to adjustments in property values.

Similarly, investors in the real estate sector now adjusted their investment strategies in response to the tax implications of 7E. Many investors sought to hold properties for longer periods to defer tax liabilities; others explored alternative investment opportunities with potentially lower tax exposure.

The taxation of capital gains under Section 7E eventually seeped in to impact the overall transaction volume in the real estate market. Higher tax liabilities deterred some buyers and sellers from entering the market while prompting them to delay transactions, leading to fluctuations in market activity. Compliance with 7E posed administrative challenges for all real estate stakeholders, including buyers, sellers and real estate agents. Compliance requirements related to reporting capital gains and paying taxes accurately and timely also increased the administrative burden and costs.

Section 7E typically imposes a tax on the capital gains realised from the transfer of immovable properties. The taxable gain is calculated as the difference between the sale proceeds and the cost of acquisition of the property.

The impact of 7E, specifically on the real estate sector which is acknowledged as Pakistan’s most lucrative business sector, was bound to prompt policymakers to review and potentially revise tax policies to address concerns and mitigate adverse effects. Reconsideration of adjustments to tax rates, exemptions or implementation mechanisms was inevitable in order to support the stability and growth of the real estate market along with others. This is exactly what happened with the decision by Islamabad High Court declaring Section 7E to be ultra vires of the constitution and discriminatory in nature. Last month, the Peshawar High Court also declared the provision as not qualifying the test of Capital Value of Assets, making it beyond the legislative competence of the parliament.

Although appeals on the matter are pending, removing 7E from the Income Tax Ordinance, could have significant implications for the real estate sector in Pakistan. Eliminating the tax on capital gains could incentivize more transactions in the real estate market. Sellers may be more willing to sell their properties and buyers may find it more affordable to invest in real estate without the additional tax burden, leading to an increase in transaction volume. With increased demand and higher transaction volume, property prices may experience upward pressure. Sellers may capitalise on the removal of capital gains tax by pricing their properties higher, especially in areas experiencing high demand.

Removing Section 7E could enhance investor confidence in the real estate sector. Investors may view the market as more attractive without the imposition of capital gains tax, potentially leading to increased investment in real estate projects and developments. The removal of capital gains tax may improve market liquidity by reducing barriers to entry for buyers and facilitating easier exits for sellers. This could contribute to a more dynamic and efficient real estate market. Without the burden of capital gains tax, more property owners might be inclined to sell their properties, leading to a surge in transaction volume. For example, individuals holding properties for investment purposes might find it more lucrative to sell properties without incurring tax liabilities, resulting in more listings in the market.

However, eliminating the tax on capital gains may also result in a reduction in government revenue derived from real estate transactions. The government would need to consider alternative revenue sources or adjust budget allocations accordingly to compensate for the potential loss of tax revenue. Policymakers could be prompted to reassess their approach to real estate taxation and formulate alternative strategies to achieve fiscal objectives while ensuring fairness and equity in taxation.

While the removal of capital gains tax may stimulate short-term growth in the real estate sector, policymakers will need to monitor market dynamics closely to prevent speculative bubbles or destabilising effects on the economy.

Removing Section 7E from the Income Tax Ordinance could have both positive and negative consequences for the real estate sector in Pakistan. It could stimulate market activity, enhance investor confidence and promote economic growth, but it will also require careful planning and consideration of potential fiscal implications.

The writer is the CEO at ZAKCasa and Verde as well as a managing partner at a law firm, namely Lex Mercatoria