Due to the rampant social, economic and political unrest in Pakistan, the country’s real-estate sector has been in turmoil for about one whole year. This sector is highly dependent upon the overall positive sentiment, whereby investors and buyers of real-estate inject funds in different assets, with the expectation of making decent returns.
That is not all, Pakistan’s real-estate sector also acts as an indirect engine for economic activity in the country. Other related sectors, such as Financial Services, Construction, Cement and Steel etc. experience activity, whenever this sector is performing well.
Instead of providing helpful incentives to the real-estate sector, the Government has done exactly the opposite. Succumbing to the likely pressure of the International Monetary Fund (IMF), and in a bid to document the economy, the Federal Board of Revenue (FBR) has introduced Section 7-E to the Income Tax Ordinance (ITO) of 2001.
In this post, we will analyze the various aspects of this amendment to the ITO, and also discuss its detrimental effect on the already struggling real-estate sector.
FBR’s Mandatory Verification Form for Property Sellers
The Federal Board of Revenue (FBR) has taken a step to enhance transparency in property transactions. The apex tax authority in Pakistan has introduced a mandatory verification form for property sellers, under Section 7-E of the Income Tax Ordinance (ITO), 2001.
Purpose of the New Form
Theoretically speaking, the newly introduced change is expected to serve the following purposes: –
- Streamline the tax collection process for property transactions.
- Ensure transparency and clarity in property dealings.
- Prohibit the transfer of ownership / title of real estate assets, unless proof of tax payment is submitted to the transferring authority.
Key Features of the Verification Form
Design and Provisions
The form, crafted under Section 236-C, sub-clause – 2A, is directly applicable on property sellers. Before any property transfer, sellers must:-
- Submit this form to the registering authority.
- Ensure it contains pertinent and valid details about the property itself, the seller, and proof of tax payment to the exchequer.
Essential Details in the Form
- Seller’s Information: Name, address, National Tax Number (NTN), or valid Computerized National Identity Card (CNIC).
- Property Details: Type of the real-estate asset (plot, apartment, constructed premises etc.), location, province, district, and tehsil/town.
- Tax Information: Amount of tax chargeable under Section 7-E, derived as a percentage of the property’s fair market value, as declared in the tax return, and proof of tax payment, under Section 7E.
The Commissioner Inland Revenue will verify if the taxpayer / property seller has met the provisions of Section 7E, for the relevant tax year.
The Commissioner, or any other duly authorized representative of the tax collection authority will also determine the validity of any exemption that has been claimed by the seller of a real estate asset.
Role of the Transferring Authority
Defined under Section 236-C of the Income Tax Ordinance 2001, the transferring authority is responsible for:-
- Registering, recording, and attesting property transfers.
- Collecting advance adjustable income tax from sellers.
The tax rate stands at 3% of the asset’s total consideration, for those on the Active Taxpayer List (ATL). However, if the seller of a property is not on the ATL of FBR, the rate of tax doubles to 6% of the total consideration of the asset.
Impact of Section 7-E on the Real Estate Sector
Introduced via the Finance Act 2022, the goal of Section 7E is to consider every resident as having derived an income, equal to 5% of the fair market value of the real estate asset in Pakistan.
However, it is pertinent to clarify that certain exceptions do apply to this rule, and a person may claim such exception, if the criterion is fulfilled.
The rate of tax on this assumed / deemed income is 20%, translating to 1% of the property’s fair market value.
To put this rule in simple terms, a property’s seller will pay 1% of the fair market value of the property as tax (on deemed income), prior to transfer of its ownership title to any other individual or legal entity.
If any dispute arises on the fair market value of the property being sold, the Government defined valuation / D.C rates shall apply, for the purposes of calculating the deemed income.
Updates to the Finance Act of 2023
A new sub-section 2-A has been added to Section 236-C of the Income Tax Ordinance, 2001. This clause prevents any transferring authority from processing the transfer of property’s ownership title, unless the seller has met the tax obligations under Section 7-E.
The seller of property must also furnish proof of this compliance. This initiative aims to align property transactions with FBR’s tax regulations, fostering transparency and tax adherence in the real estate domain.
However, given the current economic circumstances of Pakistan, and an already struggling real-estate sector, this measure will further strangulate economic activity across Pakistan.