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Federal Board of Revenue (FBR) has made significant changes in the taxation of capital gains on disposal of immovable property of Pakistan.
Amendment in the Income Tax Ordinance 2002, through the Finance Act 2020, reduces holding period and tax rates on different amounts for computation of capital gains on disposal of immovable property
According to a Circular No. 3 issued on September 3, 2020 by the FBR, holding period and tax rates on different amounts for computation of capital gains on disposal of immovable property (Section 37, Section 236C and Division VIII of Part I of the First Schedule) have both been reduced.
The changes have been made through an amendment in the Income Tax Ordinance 2002, through the Finance Act 2020.
Capital gains are profits made from the sale of an asset with respect to the costs associated with it and are generally taxable throughout the world. The tax rate applicable to capital gains on the disposal of immovable property depends on the amount of capital gain earned.
In Pakistan, the aggregate tax applicable to capital gains on the disposal of immovable property is dependent upon the holding period and the tax rates.
A longer holding period indicates that a property was not bought for the purpose of making a profit on its resale, and hence, leads to lower taxes. On the other hand, a higher amount of capital gains earned is subjected to a higher tax rate by the authorities, leading to higher taxes.
The maximum holding period attracting taxation of capital gains on disposal of immovable property has been restricted to four years and percentages of taxable capital gain have been rationalized with reference to holding period, FBR added.
According to section 11 of the circular, tax rates for capital gains on the disposal of immovable property have been reduced and corresponding changes in section 236C have been made in respect of holding period and tax rates.
Keep in mind, First buyer of property not required to explain source of funds in the projects which are registered in the FBR
The first purchaser of a property, including a building or a unit in the building, is not required to explain the source of funds used for purchase from a project registered with Federal Board of Revenue (FBR) under the Fixed Tax Scheme for the construction sector.
FBR, through its FAQs, has confirmed that the incentives are available for the purchasers in terms of requirement to explain source of funds. The first purchaser of a building or a unit in the building is not required to explain the source of funds used for purchase from a project registered with FBR under this scheme if the complete payment is made before September 30, 2022 and is made through banking channels.
Similarly, the source of funds will not be inquired into if a plot is purchased by December 31, 2020, the payment is made by December 31, 2020 through banking channels, the person registers himself as a builder with FBR and completes construction on such plot by September 30, 2020.
The scheme provides immunity from the provisions of section 111 of the Income Tax Ordinance, and no questions will be asked regarding nature and source of funds from investors making capital investment in new construction projects in the form of money or land, either as an individual, as an association of persons or a company, subject to the specified conditions.
In case the investor is an individual, the investor shall open a new bank account and deposit such amount in it on or before December 31, 2020. Moreover, the investor shall have the ownership title of the land as on April 17, 2020.
In case the investor is a corporate shareholder/Partner of a single object company or partnership formed after April 17, 2020, the FBR explained that such amount shall be invested through a crossed banking instrument deposited in the bank account of such association of persons or company, as the case may be, on or before December 31, 2020 Land owned by a partner or shareholder as on April 17, 2020 shall be transferred to such association of persons or company, as the case may be, on or before December 31, 2020.
To another query, FBR stated that the Fixed tax scheme encompasses a new project as well as an incomplete existing project subject to completion of such projects by 30th September, 2022. A ‘new project’ means a construction or development project, which commences during the period starting from April 17, 2020 till December 31, 2020 and is completed on or before September 30, 2022.
However, an ‘existing project’ means an incomplete construction or development project, which has commenced before April 17, 2020, is completed on or before September 30, 2022 and a declaration is provided in the registration form with regard to the percentage of completion of the project up to the last day of the accounting period pertaining to Tax Year 2019.
The tax payable by builders and developers on their income, profits and gains emanating from the sale of buildings or plots shall be determined on a project by project basis on the basis of specified rates per square foot/per square yard for commercial and residential buildings and commercial, residential and industrial plots.
In the case of buildings having dual usage, ie, both commercial and residential the respective rates specified for each category shall apply. Moreover, in case the development of plots and construction of buildings upon the same constitutes a single project, the respective rates for developers and builders shall both apply, the FBR added.
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