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.
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.
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.