"Over three years'' holding: no advance tax on property deals: FBR

The Federal Board of Revenue (FBR) has said that no advance income tax will be collected on immovable property transactions under Section 236C of the Income Tax Ordinance if the immovable property is held for a period exceeding three years.
According to a brief prepared by the FBR for National Assembly Standing Committee on Finance regarding investment in domestic real estate sector, under entry No. 47 of Part-I of Fourth Schedule to the Constitution of Islamic Republic of Pakistan, National Assembly has been empowered to impose taxes on income excluding agriculture income. Accordingly the National Assembly has levied taxes on different streams of income arising from real estate sector by various provisions of the Income Tax Ordinance, 2001.
Income earned as gain from disposal of the property is subject to tax under section 37 of the Income Tax Ordinance, 2001 under the head income from capital gain. Also, there is no tax on income from capital gain under the aforesaid section, if the holding period of immovable property is more than three years. However, where a person makes investment but fails to explain the source of such investment, the amount so invested is treated as income from unexplained sources under section 111 and is taxable as income from other sources under section 39 of the said Ordinance, the FBR said.
In respect of business income of a person earned from a long-term construction contract, the tax imposed under section 36 of the Income Tax Ordinance, 2001 is on the basis of the percentage of completion method. Besides, advance income tax under sections 236C and 236K introduced through Finance Acts, 2012 and 2014 respectively is adjustable against the ultimate tax liability of the taxpayer and if there is no tax liability, the same is refunded, the FBR said.
The above-referred taxation provisions are dependent on the value of the immovable property. Prior to tax year 2016, this value was deemed under Rule 228 of the Income Tax Rules, 2002 as value fixed for the purpose of stamp duty by the provincial and development authorities. However, through Finance Act, 2016, amendment was made in section 68, whereby FBR was empowered to determine the fair market value of immovable property.
In pursuance of the aforesaid amendment, the FBR after consultation with all the stakeholders notified valuation of immovable properties in 21 major cities which are higher than DC rates. The notified values by FBR removed the ambiguity in determining the value of property and brought certainty in understanding the tax impact under sections 236C and 236K.
Yet there is no tax under section 236K if the value of property is up to Rs 4 million and similarly no tax is collected under section 236C if the immovable property is held for a period exceeding three years. However, in respect of registration of property at a value less than the rate notified by FBR, the difference is taxed @ 3 percent and no source of investment to that extent is asked, the FBR added.