CGT collection on immovable property: parliament can authorise FBR: ruling

The Law and Justice Division has informed the Federal Board of Revenue (FBR) that Parliament has the authority to do legislation for empowering the federal government to collect capital gains tax (CGT) on immovable property after 18th Constitutional Amendment.
Sources told Business Recorder here on Friday that FBR Member Legal Muhammad Aqil Usman had legally interpreted the applicability of CGT on immovable property after 18th Amendment. The FBR Legal Wing interpreted that the CGT could be imposed on the immovable property after 18th Amendment. This interpretation was endorsed by senior Members of the Tax Reform Co-ordination Group (TRCG) chaired by Dr Abdul Hafeez Shaikh, Minister for Finance. However, the FBR has also sought the opinion of the Law Division for confirmation of the interpretation by the FBR.
The viewpoint of Aqil Usman has been fully endorsed by the Law and Justice Division and it ruled that the Parliament can authorise federal government to collect CGT on the immovable property through legislation. Therefore, the federal government can collect CGT on immovable property after 18th Amendment.
As far as the minimum asset tax (MAT) is concerned, the Law Division opined that the MAT cannot be collected by the federal government, as property is a provincial subject. After 18th Amendment, the federal government cannot impose tax on the value of the asset. The written clarification of the Law Division on the MAT has yet to be received by the FBR.
According to sources, the FBR has two options for collection of CGT on purchase and sale of immovable property. The FBR can move a separate bill to the Parliament for legislation to authorise the tax machinery to collect CGT on immovable property. Another option is to introduce the amendment in the Income Tax Ordinance 2001 through Finance Bill (2012-2013).
In this case, the FBR has to wait for at least for one year for obtaining approval of the Parliament in this regard. The most important aspect of the CGT is to work out the collection mode for the CGT on immovable property. The CGT would be collected from the seller as the gain has been arisen from the sellers. On the other hand, the collection of CGT is different from the capital value tax (CVT) on buying and selling property. The CVT was collected from buyers of the property when the FBR empowered them to collect the same during previous years.
Sources said that the legal status of the applicability of the CGT on sale and purchase of property was discussed during the last meeting of the TRCG. The exclusion of the ''immovable property'' from the section 37 (Capital Gains) of the Income Tax Ordinance 2001 could empower the FBR to collect capital gain tax on property transactions without legal implications.
Presently, immovable property is exempt from capital gain tax under section 37 of the Ordinance 2001. If the government amends the Income Tax Ordinance 2001 through the Finance Act, the immovable property could be directly brought within the purview of the capital gain. Primarily, the present taxation of the capital gain is restricted to buying and selling of shares. In case the exemption granted to the immovable property from capital gain is withdrawn, the difference of purchase and sales of property may be liable to capital gains tax.
Keeping in view the huge investment in the real estate sector, the amendment in section 37 of the Ordinance 2001 might be helpful for the government to generate a huge amount from the capital gain tax from 2011-2012. If such kind of proposal is considered, the FBR can draft detailed rules on the taxing capital gains on the immovable property. One of the way to tax urban properties is to expand the scope of section 37 (Capital Gains) of the Income Tax Ordinance 2001.
Sources added that the section 37 of the Ordinance 2001 deals with the Capital Gains under which a gain arising from the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under Income Tax Ordinance 2001 shall be chargeable to tax in that year under the head-Capital Gains.
Under the provision, the capital asset means property of any kind held by a person, whether or not connected with a business, but does not include (a) any stock-in-trade consumable stores or raw materials held for the purpose of business; (b) any property with respect to which the person is entitled to depreciation deduction under section 22 or amortisation deduction; (c) any immovable property; (d) any movable property [excluding capital assets specified in sub-section (5) of section 38] held for personal use by the person or any member of the person''s family dependent on the person.
If in sub-section 5 (c) any immovable property is included in the definition of property for the purpose of capital gains, amendment would be required in section 37 of the Ordinance 2001. Through the proposed amendment, the immovable property could be considered as capital asset for chargeability of tax under the head - Capital Gains.