LAHORE: The recent ruling by the Lahore High Court (LHC) that the federal government could not tax immovable property as income has barely come out yet players in the real estate market have already begun preparations for a resurgence in the business of buying and selling plots.
What is going on?
The idea to tax unused immovable property in itself is not a bad one. Property is generally a great means of storing wealth in Pakistan and largely remains undocumented and untaxed. The issue here is that with the FBR imposing and collecting this tax, the federal government is in essence collecting property tax. While the FBR has claimed and is arguing in court that this is an income tax and not a tax on property, the lines are blurry.
The new law mandated that every property which is not in the use of the owner, will be “deemed” by the FBR as bearing a rent equivalent to 5% of the total market value to the property. This “deemed rental income” would be taxed at a rate of 20%. In simple words, every property owner would have to pay a tax equivalent to 1% of the market value of his property to the federal government.
In its decision, the LHC has made this distinction clear. It deemed that the tax imposed on deemed income on immovable properties as ultra vires to the Constitution under Section 7E of the Income Tax Ordinance 2001. It is pertinent to mention here that three days ago Justice Shahid Jameel Khan of Lahore High Court ruled that treating the market value of immovable property as income is beyond the competence of the federal legislator.
However, in a 50-page judgment, Justice Khan said that accumulation of wealth through unfair means can be checked and criminalized through taxing provisions along with amendments to corresponding provisions of other relevant laws. A senior Federal Board of Revenue (FBR) official told Profit that a term used to propose a new type of property tax in Budget 2022-23 was ‘deemed rental income’.
What is the proposed tax?
A senior Federal Board of Revenue (FBR) official informed Profit that one term used in the budget 2022-23 to propose a new type of property tax is ‘Deemed Rental Income’. “The proposal was that the rent for properties with a fair market value of 25 million or more will be considered 5 percent and it will be taxed at 20 percent per annum. For example, if the fair market value of a property is RS 30 million then five percent rent will be 1.5 million and if 20 percent tax is levied on it, then this amount becomes RS 300,000. However, the purpose of the proposal was that the government would like to impose tax on properties which do not have any utilization and those properties are held so that when the value goes up it can be sold at a good price. These properties include open land, agricultural land, commercial and residential land, which have been held only in anticipation of rising prices.”
“The proposal also exempted six types of properties, all of which were for personal use, residential or business purposes. Similarly, properties owned by the local government, properties owned by the government development authorities, land development and construction projects of builders and developers who are registered with the Director General of Non-Finance Business and Professions Board and the properties valued at less than RS 25 million,” he explained.
According to the official, properties which generate rental income and if the tax value in their return is less than the fair market value then it will also be equal to the market value. However, it is still proposed to make it part of the law.
However, the budget also introduced more taxes on properties, which the people of the real estate sector were not ready to accept. For example, some changes have been made in the Capital Gains Tax on Immovable Properties and it has been divided into three categories. The first category was for open plot, the second for constructed property and the third for flat.
If the open plot is held for one year, the capital gains tax on it will be 15% and then it will be gradually reduced every year and after six years there will be no tax on it. There was already a four-year gain tax on the constructed property, meaning that if you do not sell your property for four years, you do not have to pay any tax on the sale after that. Similarly, flats will be subject to gain tax for only two years. If the flat is held for one year, it will be taxed at 15% and for two years at 7.5%.
Similarly, some changes have also been made in section 236C and this section deals with advance tax on sale or transfer of immovable property. Under this section normally one per cent tax is charged on transfer of property. Earlier this rule was made that if any property is sold after four years, then this section will not be imposed on it but now its period has been extended to ten years. Similarly, under Clause 9A, all ex-servicemen of the federal or provincial authorities were entitled to a capital gains tax exemption of up to 50% if they sold a plot and up to 75% if they sold after three years. Now this clause has also been drawn in this budget, i.e. now these people will be charged the same capital gains tax as other people.
Real estate sector expecting activity
On the other hand, people related to the real estate sector and property dealing are very happy with this decision of LHC. Speaking to Profit, Chaudhry Afzal, the owner of a real estate project on Ferozepur Road, informed that with this decision, the expectations of reviving the stalled real estate business have increased.
“Many people who want to invest in the real estate sector were worried about the proposal of Deemed Rental Income. If we talk about Lahore only, FBR has already increased the property rates so much that a ten marla plot in an average area cost more than RS 25 million. If you leave Lahore and move to other cities, property rates are high there too. If I want to start projects for housing societies or commercial plazas in Lahore, I have to buy land and it is not like I will buy land and within a year it will be sold. Obviously there will be development costs, it will have to be approved by the relevant authorities and then I will be able to market and sell it. The entire process takes at least three to five years. Now if my land is not sold in three years and its market value is more than 25 million then under the above proposal I will only pay taxes every year and will not be able to develop. Or I will increase the price of land so much that the common man will not be able to buy it. Another aspect was that investors started shying away from buying more than one plot in their name because they would have to pay deemed income tax on it,” Afzal concluded.
LHC DECISION IS GOOD IN THE FORTUNE OF REAL STATE OWNERS.
Tax evaders are criminals and should be treated as such. The whole plot business is to launder illegal money and evade taxes.