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EDITORIAL: Representatives of the influential real estate sector informed the National Assembly Standing Committee on Finance that registration and transfers of immoveable properties across Pakistan have ceased after implementation of Section 7E (income tax on deemed basis) effective July 1, 2022.

It is relevant to recall that the Finance Act 2022 introduced Section 7E whereby every resident was to be treated as having derived income equal to 5 percent of the fair market value (as notified by FBR) of the assets in Pakistan to be chargeable at the tax rate of 20 percent or effectively one percent of the share market value of the immoveable property.

This distinction was necessary subsequent to the passage of the eighteenth amendment which did not allow the federal government to collect taxes on value of immovable assets, i.e., real estate and was driven by the government’s need to increase tax collections to meet the ever rising federal expenditures and to meet the revenue targets set by multilaterals/bilaterals with the objective of containing budget deficits.

On 22 March 2023, after the Sindh High Court had ruled in favour and the Lahore High Court declared it illegal, a special bench under Chief Justice Umar Ata Bandial allowed taxpayers to pay only 50 percent of the assessed deemed income until the final decision which is still awaited.

The Supreme Court bench observed that the Federal Board of Revenue should expand the tax base rather than enhancing taxes on compliant members - an observation that has considerable merit.

However, in the instance of the real estate sector there is overwhelming evidence that it is not only a source of massive profits but is also being used as a medium for whitening black money.

It is important to note that Income Tax circular number 01 of 2023-24 stipulates that FBR designates any person responsible for registering, recording, or attesting the transfer of immovable property as the “transferring authority”, holding it responsible for collecting advance adjustable income tax from the seller or transferor, as specified under section 236C of the Income Tax Ordinance, 2001.

It is also relevant to note that in the section titled ‘Memorandum of Economic and Financial Policies’ uploaded on the International Monetary Fund website on 12 July 2023 under the Stand-By Arrangement pledged to increase (i) advance tax on the purchase and sale of immoveable property from 2 percent to 3 percent expected to add 46 billion rupees in revenue, (ii) collection of annual tax on second homes and other high wealth items from non-filers at one percent of the value with an expected yield of 19 billion rupees and (iii) raise advance tax from builders and developers based on land size to generate 15 billion rupees.

It is imperative to acknowledge that the leverage of Pakistani administrations to persist in heavily relying on indirect taxes whose incidence on the poor is greater than on the rich (around 60 percent of all budgeted taxes are indirect with around 70 percent of direct taxes imposed as withholding taxes in the sales tax mode which effectively renders it as an indirect tax) - a reliance that perpetuates elite capture - has been severely compromised on two accounts: (i) the capacity of the general public to meekly accept ever-rising indirect taxes with inflation at over 28 percent, growth rate at negative 0.5 percent leading to business closures in recent months, which has fueled unemployment pushing ever larger numbers under the poverty line; and (ii) the refusal of international lenders to lend without structural reforms particularly in the tax and power sectors. The need for structural reforms is therefore critical that must focus on not only raising tax collections but also on rationalising the sources of taxes to ensure their greater acceptability within the general public and amongst donors.

Copyright Business Recorder, 2023


Comments are closed.

Tariq Qurashi Aug 08, 2023 11:43am
The government wants overseas Pakistanis to return to Pakistan and invest here. However if they make the mistake of returning here, they will be taxed on all their foreign assets on which they are already paying taxes abroad. This is because in their wisdom the FBR wants to tax all their properties abroad although these properties are owned in a country beyond their jurisdiction. So much for encouraging FDI. This is the usual ill thought out short term fix; without thinking of the long term consequences. As far as 7E is concerned; most people save their money in plots because this is one of the only ways to protect themselves against inflation. Now the FBR want to tax empty plots, which are peoples savings. There is no "deemed income" from an empty plot. Absolutely brilliant!! What will they think of next?
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Aamir Aug 08, 2023 11:52am
This is an unjustified tax as it is taxing wealth and not income. Lots of properties are lying vacant due to economic downturn and there is no possibility of rental income from them. If wealth tax is to be collected then it should be in all wealth and not just the real estate sector.
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Johnny Walker Aug 08, 2023 01:52pm
This is what can be expected from literate illiterates running the department/country.
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Awami Aug 10, 2023 08:37pm
@Tariq Qurashi, Such tax is totally unfair and will result in stopping of OP investments in land and it's future development.
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