The dilemma that is property valuation for the purpose of tax calculation has been embroiled in a bit of a controversy for the past one month. However, the Federal Board of Revenue (FBR) and real estate stakeholders have finally reached a conclusion.
During a meeting held between the FBR and real estate stakeholders on Saturday with Finance Minister Ishaq Dar in the chair, many major and promising decisions were taken.
Property valuation
The market value of property will not be considered for calculating taxes. In its stead, the FBR will determine the fair market value of properties. The valuations decided will be used to calculate capital gains tax (CGT), withholding tax (WHT) and also to apply Section 111 of the Income Tax Ordinance. For your information, this particular section deals with unexplained income or assets.
Some sources claim that the property values determined by the FBR are 200% to 300% more than the current Deputy Commissioner (DC) Rate. However, Dar, during his press conference yesterday, barred those present from quoting any figures until valuation tables have been made available publicly.
Capital Gains Tax
Initially, it was proposed by the government that property sellers will pay CGT at the rate of 10% if they sell their property within 5 years of purchase. However, the government has now announced new tax slabs, effective from July 1, 2016, for the purpose of calculating CGT.
According to the newly proposed rule, if a property is sold within 1 year of purchase, 10% CGT will be applicable, while on selling the property between 1 and 2 years, 7.5% CGT will have to be paid, and if the holding period is between 2 and 3 years, the CGT will be taken at the rate of 5%. No CGT will be charged on property sold after 3 years.
Property transactions completed before July 1
For property transactions carried out before July 1, 2016, the property seller will have to pay 5% CGT if the holding period is less than 3 years. No CGT is to be paid if the holding period is more than 3 years.
Withholding Tax
The government has given relief to property buyers with respect to the basic threshold for the purpose of calculating WHT, which will now be applicable if the property value exceeds PKR 4 million. Previously, the threshold was PKR 3 million. This move will most likely shift investor focus to smaller plot categories.
The newly suggested rules will only be applicable for federal property taxes. For the calculation of provincial taxes such as capital value tax (CVT) and stamp duty, the property valuations are notified by the district collector in line with Section 27-A of the Stamp Act, 1899. According to a news source, the provincial governments will be informally invited to use valuations determined by the FBR to calculate property taxes.
The government plans to generate PKR 10 billion in the financial year 2016-17 through the newly proposed taxes and property valuations for tax calculation, which will most likely bring transparency to the real estate industry. With the availability of valuation tables, every property buyer or seller will able to calculate property taxes and take informed buying or selling decisions.
Now that the dust has settled and property tax ambiguities have been removed, stagnancy in the real estate market will come to an end and sale-purchase activity and property prices will pick up in the days to come.
Related News
Hi Zain,
What do think about the prices in future specially in Karachi? What will be short term and long term impact?
Thanks
Salman
The way it seems the prices will go up as the sellers would like to compensate for the added taxes in their demands .
Prices can only go up when demand is more than supply. If buyers reluctant to purchase properly due to added taxes, if would have negative impact on market.
Due to high increase in population demand has also increased and will continue to increase where as no input of Government in the construction of houses for population , rate of property are likely to increase. Buyer will have overall disadvantage. It is also because of black money in the sector. Government is only looking to earn more and more money. That’s it.!
Nice to see u after long time Zain Bhai and thanks for this article.
PROPERTY PRICES WILL CRASH IN SHORT AND LONG TERMS PARTICULARLY IN KARACHI WHERE THERE IS HUGE GAP BETWEEN DC RATE AND ACTUAL RATE . ANOTHER BIG BURST AHEAD
I believe this is the best decision taken by the Government at the right time. This sector was getting way too out of control.
will property come down.. registry as per fbr rate… or payment as per market value..
Dear Zain,
One of my family friend has transferred some land to DHA from his family land Dha give them plot against that land will CGT apply on selling this plot received against the land.
Those who keep their everything out of country are now trying to bring so called “transparency to the real estate industry” Why not they bring back revenue from their companies?
Real estate market will make correction and go in hibernation mood for some time.
What about the Provincial Govt. Tax on vacant plots @ 10% after two years of purchase ?
I WAS JUST THINKING ABOUT THE NATURE OF REAL ESTATE BUSINESS IN PAKISTAN. I CAME TO CONCLUSION THAT THIS WAS JUST LIKE ROYAL CASINO UNTIL NOW. I APPRECIATE THE GOVERNMENT FOR TAKING SUCH MEASURES. I HOPE WITH THESE MEASURES, REAL ESTATE WOULD BE A GENTLEMAN’S BUSINESS . WHERE THE LAW, HONESTY AND TRANSPARENCY WILL PREVAIL.
Raju
Thats a crapy view. Because if taxation is so fair in pakistan and the collected tax is actually spent on the people for better education, health and industries to create jobs then does make sense. But if your paid taxes are going to spend on the protocols for the kids and dogs of politicians, or for the holidays and pleasures of rulers or even for the aeroplane taxes because they not able to travel 5 miles extra to the usual airport terminal, then you should think 10 times before supporting your own current view…
Raza
This article is wastage of time. People want to know what is the new decided rates in DHA & Bahria town. Mr. Zain, would you please do some research and shed some light on rates. (Or old D.C. rates).
The New DC Rate (Fair market Valuations) are not yet published the Rumor mill is hot on revision from 25% increase to 300% increase … in a couple of weeks rates will be published and market will show its trend accordingly (till that time old / exisiting DC Rate) will Apply !
No mention of house builders how will this affect house prices?
Real Estate Market is going to crash save your money.
how much Withholding Tax (in %) will apply if property value is 7 to 8 million ?
who will pay this ? buyer or seller ?
Please advise.
Real estate market will take a breather for 1 to 2 quarters and start rising again because of demand and supply fundamentals and lak of quality locations such as DHAs. Look Dubai example is in front of us. There is 4% registration fee on sale value of each transaction plus approximately 2% on top such as brokerage commission and few other charges. So 6% each way one every transaction. Now the reason Dubai has slowed down is due to oil price decline NOT due to 6% charges mentioned above. I believe same will happen here.
What ll be tax formula?
If I purchased a plot worth 45lac in bahria nasheman before 30 june 2016 and if I sale it @47 lac next year what would be new tax formula? Though Bahria dont know that for how much I purchased they just took their transfer fee of 88000.
How will FBR propose fair market rates in retrospect? The price of land is not the same in any locality for all years. For example if the sellers are to pay CGT for a plot bought two years ago and sold it before the completion of three years the actual price was much less than what it is today.
This will be an unfair system of tax collection unless FBR produces a list of enhanced DC rates for each year for all localities staring from 2012. How can FBR decide on under developed and not possession plots of DHA & Bahria with the ones which are already developed if they decide one rate for these localities?
Moreover, no where in the world are taxes collected for past years when the rules are changed in the present year. Actually this new rule should apply to only those properties which are bought and sold from July 1, 2016. All sellers and buyers of previous years will go to court against this unfair system.
rates will go down..as investor left proprty..
I want to know that these tax will pay by seller or buyer or both ?
what will be the new tax if the cost of 50 lac?
where this tax has to pay ?
Every one asking questions, is there anyone to answer ?
????
you did not mention about the 4% tax on property for filers and non-filers ? what about that ? that matter is still not resolved ??
Not only the population but same time there is no other lucrative avenue where one can gain definite profit at the moment hence this property sector will continue to grow in terms of prices hike, and all will be loaded to the buyer.
It depend when you have purchase the property and when you want to sale property.
According to the newly proposed rule, if a property is sold within 1 year of purchase, 10% CGT will be applicable, while on selling the property between 1 and 2 years, 7.5% CGT will have to be paid, and if the holding period is between 2 and 3 years, the CGT will be taken at the rate of 5%. No CGT will be charged on property sold after 3 years.
This is paid by seller on his profit.
Dear Zain
Thanks for sharing the information. Can you please share your knowledge about the tax rules for overseas Pakistanis. According to a blog at zameen.com the same tax rules apply for overseas Pakistanis but the tax % will be half of actual tax %. Can you please share your thoughts in this respect thanks.
Raza
The sad thing is this that all these taxes will be ultimately shifted to assets abroad.
Dear
Can you please upload the valuation table of Karachi…it would be great to assess .Thanks