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Federal Government Imposes New Taxes on Real Estate in Fiscal Budget 2022-2023

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The federal government has imposed new taxes on Real Estate Sector in the annual budget for financial year 2022-2023. The government has not only increased the advance and capital gain taxes already applicable on buying and selling of properties, but also introduced a new “Deem Tax” on unused/additional properties. In this page, we will explain about these taxes and the potential impact on real estate sector in Pakistan.

The federal government has imposed 440 billion in new taxes on the real estate sector in this budget for 2022-2023. FBR Chairman Asim Ahmad said that the Federal Board of Revenue has submitted a proposal of 440 billion in new taxes to the federal government, which was approved and presented in the budget.

Following is the division of new real estate taxes:

  • Rupees 34 Billion in terms of Customs Duty
  • Rupees 316 Billion in terms of income tax
  • Rupees 90 Billion in terms of Sales Tax and Federal Excise Duty

Furthermore, he informed the press that FBR has decided to provide relief of 85 Billion in taxes to the real estate sector in the next fiscal year. A total of 316 Billion in taxes will be imposed in the next budget. The detail of the implemented tax ratio is also made public by the Federal Board of Revenue.

Deem Tax

FBR has imposed a 1% Deem Tax on the unused/additional property worth more than 2.5 crore. This includes unused houses, plots, farm houses or any land holding which has value above 2.5 crore but it doesn’t create regular income. The Government has deemed the income of such properties at 5% per annum, out of which 20% will be taxed.

For Example, you own a plot worth 5 crore. The Government will assume the income on this plot at 5% which is 25 lacs. The applicable tax will be 20% of the assumed amount, i.e. 5 lac. In other words, you will pay 1% tax of total FBR value of your property worth above 2.5 crore.

Please note that this tax does not apply on your first property whether house or plot. It applies to people owning multiple properties. This measure mainly aims to tax the amount buried in plots which does not contribute to economy.

Capital Gain Tax

Capital Gain Tax period has been increased to 6 years. Earlier, CGT would apply if you sold your property within 4 years, and tax rate would decrease each year. As per new amendment, the effective period will be 6 years and maximum tax rate will be 15%.

This means if the property is sold within one year, 15% tax is applicable, 12.5% in 2 years, 10% in 3 years, 7.5% in 4 years, 5% in 5 years, 2.5% in 6 years, and 0% in 7th year. 40 billion in revenue will be generated by doing so.

Following is the Capital Gain Tax period for different property types:

  • Plots: CGT will apply if you sell a plot before 6 years, and 0 tax in 7th year.
  • House: CGT will apply if you sell a house before 4 years, and 0 tax in 5th year.
  • Apartment: CGT will apply for first year, and 0 tax from 2nd year.

This measure also encourages investment in apartments and houses (construction) and discourages investment in plots.

Advance Income Tax

Advanced tax on sale or purchase of immovable property has been increased to 2% for tax filers whereas non-filers will pay 5% tax at the time of buying a property. Earlier the Advance tax was 1% on filers and 2% on non-filers.

This measure can adversely impact on sale purchase activity as the cost of buying a property will significantly increase so investment incentive will diminish with such high taxes.

Impact of New Tax Policies

According to the federal government, these new property taxes will not only generate huge revenues for the Government but also discourage investors and empower general public to be able to buy a property. Moreover, affluent classes who own multiple properties will be able to contribute to the country through taxes.

The real estate community approves part of the amendments which discourage property investment by non-filers, but other amendments which entail discouraging real estate investments like this “Deem Tax” and doubling of advance income tax on filers are likely to impact this sector adversely.

It is important to mention here that a large number of Overseas Pakistanis buy properties in Pakistan for investment or future residence, so a large portion of remittances can be affected if they are discouraged from buying properties by imposing huge taxes.

A tax filer who buys a property for investment will end up paying the following 3 taxes:

  • Advance Income Tax 2% at the time of purchase
  • up to 15% CGT at the time of sale before 6 years
  • Deem tax 1% of FBR value per annum due to assumed income on the property

Such excessive taxation is likely to discourage real estate investments. Additionally, cost of construction has already gone up massively in the past 2 years, so builders may also stop construction activities due to low demand and high risk of loss due to increasing inflation.

Manahil Estate brings you the latest news like this one regularly to keep you updated on the real estate sector! Check out our blog for more informative content, contact us for the sale and purchase of plots in the leading housing projects!

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