Navigating Property Tax in Pakistan Budget 2023-24

Pakistan has seen significant growth in its real estate sector over the past few years. With the rise of urbanization and the growth of cities, property ownership has become a major source of income for many individuals and families. 

However, along with the ownership of property comes the responsibility of paying taxes. Property tax is one of the major sources of revenue for the Government of Pakistan.

In this article, we will discuss the current scenario of property tax in Pakistan for the 2023-2024 budget, including the Fbr tax, the process of property tax calculation, payment, and registration, and the future of property tax in the country.

In the Budget 2023-24, the Government of Pakistan has made several changes in the taxation policies regarding the real estate sector. The real estate sector has been divided into three segments, which include the plots and files sector, the construction sector, and highrise apartments. 

The aim behind the segmentation is to promote certain segments of the real estate sector and discourage investments in others. Keep in mind not to mix property tax with zakat on property. 

Types of Taxes in Pakistan

There are total 3 types of taxes in Pakistan:

• Capital Value Tax(CVT)
• Withholding Tax 
• Capital Gain Tax 

Capital Value Tax

In Pakistan, the Capital Value Tax is a tax imposed on the sale or transfer of immovable property, such as land, buildings, or houses. The rate of Capital Value Tax is determined by the Federal Board of Revenue (FBR) and can vary depending on the type of property being sold or transferred and the amount it is being sold for. 

According to the Federal Act of 2006, the Capital Value Tax rate in Pakistan is fixed at 2% of the property value at the time of the purchase agreement. However, some individuals choose to avoid paying the full amount of tax by only declaring the DC rate of the property instead of its actual market value. This practice of undervaluing the property helps individuals to pay lower Capital Value taxes.

Withholding Tax Revision

The government has revised the Withholding tax for all three segments of the real estate sector. The withholding tax is a tax that is deducted at the source on the payment made for purchasing or transferring a property. The revised withholding tax rates will be applicable from July 1, 2023. The new rates are as follows:

• Plots and Files Sector: 1%
• Construction Sector: 1.5%
• High Rise Apartments: 2%

Capital Gain Tax Revision

Capital gain tax is a tax imposed on the profit earned from the sale of a capital asset. In Budget 2023-24, the government has revised the Capital gain tax and its implications for all three segments of the real estate sector. The new Capital gain tax rates are as follows:

• Plots and Files sector: 5%
• Construction Sector: 10%
• High Rise Apartments: 15%

For Plots/files, CGT will only be applied if the property is sold before 6 years. After the 6th year, the property is exempt from CGT. The tax rate varies depending on the holding period:

15% for a holding period of less than 1 year.

12.5% for a holding period of 1-2 years.

10% for a holding period of 2-3 years.

7.5% for a holding period of 3-4 years.

5% for a holding period of 4-5 years.

2.5% for a holding period of 5-6 years. 

If the holding period exceeds 6 years, there will be no CGT applied.

For Houses/built-up properties, CGT will only be applied if the property is sold before 4 years. After the 4th year, the property is exempt from CGT. The tax rate varies depending on the holding period:

15% for a holding period of less than 1 year.

10% for a holding period of 1-2 years.

7.5% for a holding period of 2-3 years.

5% for a holding period of 3-4 years.

If the holding period exceeds 4 years, there will be no CGT applied.

For Apartments/highrise properties, CGT will be applied at a rate of 15% for the first year and 0% from the second year. The tax rate varies depending on the holding period: 

15% for a holding period of less than 1 year.

7.5% for a holding period of 1-2 years. 

If the holding period exceeds 2 years, there will be no CGT applied.

Deemed Rental Income Tax

Another major change in the budget 2023-24 is the taxation of real estate assets on a deemed rental income basis above 25 million. This means that the government will consider a property to be earning rental income even if it is not actually rented out. The property owner will be taxed on this deemed rental income. The tax rate for the deemed rental income tax is 10%.

The government's aim behind these changes in the taxation policies of the real estate sector is to encourage investments in the construction sector and discourage investments in plots and files and highrise apartments. 

These changes will have an impact on the real estate market. People stepping into real estate business and investors should consider these changes before making any investment decisions.

Revised Withholding Tax in Budget 2023-2024

The revised rates for withholding tax on the sale or transfer of immovable property have been updated by the government of Pakistan in the Budget 2023-24. An increase in the withholding tax under the Finance Act 2023 is announced which will be paid by the purchaser and seller of an immovable property before the transfer of ownership.

According to the changes in section 236C, filers of income tax returns will now be required to pay a higher withholding tax of 3%, previously 2%. Non-filers, on the other hand, will face an increased withholding tax rate of 6%, up from the previous 4%.

Similarly, the withholding tax rates for the purchase or transfer of immovable property have also been adjusted under section 236C. Filers will now need to pay 3% in advance tax, compared to the previous rate of 2%. Non-filers, however, will be subject to a significant rise in the withholding tax rate, which has been increased from 7% to 10.5%.

Let's consider an example to illustrate the revised withholding tax rates for the sale or transfer of immovable property. Suppose there is a property with an FBR (Federal Board of Revenue) value of 1 crore with the revised rates:

Filer: The filer would now pay 3% of the property value as withholding tax, which amounts to 2 lakhs (3% of 1 crore). This is an increase from the previous rate of 2%.

Non-filer: The non-filer would pay 6% of the property value as withholding tax, which amounts to 5 lakhs (6% of 1 crore). This is an increase from the previous rate of 4%.

So, as per the revised rates, a filer would pay 2 lakhs in withholding tax, whereas a non-filer would pay 5 lakhs for a property with an FBR value of 1 crore. 

Impact of the 2023-24 Budget on the Real Estate Sector

The 2023-24 budget, which was recently announced by the government of Pakistan, has had a significant impact on the real estate sector. The budget has introduced several changes to the property tax system, including an increase in the tax rate for commercial properties.

Along with an introduction of a new tax bracket for properties valued over PKR 50 Million. 

By increasing the tax rates, the FBR seeks to ensure a fair and transparent taxation system in line with the national fiscal objectives. These changes are expected to increase the revenue generated from property tax and to provide a boost to the real estate sector.

The impact of the revised withholding tax rates on the real estate sector can vary depending on several factors. Here are some potential effects:

1. Reduced demand: The increase in withholding tax rates for both filers and non-filers may lead to a decrease in demand for real estate transactions. Higher tax burdens can deter potential buyers, especially non-filers, from investing in properties.
2. Impact on property prices: The increased tax rates could put downward pressure on property prices. Sellers might need to adjust their pricing strategies to attract buyers who are now subject to higher withholding tax rates. This could lead to a slowdown in the real estate market.
3. Shift in buyer behavior: Buyers may prefer dealing with filers instead of non-filers due to the lower tax rates applicable to filers. This preference could impact the market dynamics, potentially reducing transactions involving non-filers.
4. Increased tax revenue: The higher withholding tax rates have been introduced with the aim of increasing tax revenue for the government. If successful, the increased tax collections could contribute to government funds for various developmental initiatives.
5. Compliance and documentation: The revised rates may encourage non-filers to become filers in order to avail of the lower withholding tax rates. This shift could lead to an increase in tax compliance and a greater emphasis on proper documentation of real estate transactions.

What is FBR Property Tax in Pakistan?

The Federal Board of Revenue (FBR) is the primary government agency responsible for the collection of property tax in Pakistan. Property owners are required to pay the property tax to the FBR annually based on the rental value of their properties.

The FBR has introduced a formula for calculating property tax, which takes into account factors such as the size and location of the property. The payment of property tax can be made through the official website of the FBR or by visiting the local property tax office.

How is Property Tax Calculated by FBR in Pakistan?

The calculation of property tax by the FBR in Pakistan is based on the rental value of the property. The formula for calculating property tax is as follows:

Property Tax = (Rental Value of Property x Tax Rate) / 100

The Tax Rate varies between 2% and 5% depending on the category of the property, which can be residential, commercial, industrial, or agricultural.

How to Make Property Tax Payments to FBR in Pakistan?

The payment of property tax to the FBR can be made through the official website of the FBR or by visiting the local property tax office. The payment can be made in the form of a demand draft, cheque, or through online banking.

Property owners are advised to keep a record of their property tax payments to avoid any confusion or disputes in the future.

Why is it Important to Pay Property Tax to FBR in Pakistan?

Paying property tax to the FBR is important for several reasons. 

• Firstly, it is a legal requirement for property owners in Pakistan. 
• Secondly, the revenue generated from property tax is used for the development of local infrastructure and other public facilities. 
• Finally, failing to pay property tax can result in penalties and legal consequences for the property owner.

Annual Property Tax Calculation in Pakistan

In Pakistan, annual property tax is calculated based on the size and location of the property. The Federal Board of Revenue (FBR) has introduced various categories of properties, including residential, commercial, industrial, and agricultural.

The tax amount for each category is different, and it depends on the location, age, and type of property. For instance, a residential property located in a high-end area would be taxed at a higher rate as compared to a similar property located in a less developed area.

In order to calculate the property tax, the FBR has introduced a formula based on the rental value of the property. The formula is given in the above-given information.

Once the property tax has been calculated, the next step is to make the payment. The payment of property tax can be made through the official website of the FBR or by visiting the local property tax office. The payment can be made in the form of the following:

• Demand Draft
• Cheque
• Online Banking

Property Registration Tax in Pakistan

In addition to the annual property tax, property owners in Pakistan are also required to pay a property registration tax. This tax is levied at the time of purchasing a property and is based on the value of the property. There is a proper detailed way to register your property in Pakistan that needs to be followed. Only then one is able to pay tax in recognition of FBR.

The property registration tax is collected by the provincial revenue departments and is used for the development of local infrastructure and other public facilities. For example, if you are living in Lahore then you will pay tax in accordance with the property tax in Punjab. 

The Future of Property Tax in Pakistan

The real estate sector in Pakistan is growing at a rapid pace, and the government is constantly looking for ways to increase its revenue from the sector.

In the future, it is expected that the government will introduce new measures to make the property tax collection process more efficient and to increase the revenue generated from property tax.

In Conclusion

Property tax is a crucial source of revenue for the government of Pakistan, and it is the responsibility of property owners to pay the tax. The calculation and payment of property tax is a straightforward process, and the government has introduced various measures to make the process easier for property owners.

The future of property tax in Pakistan looks promising, with the government expected to introduce new measures to increase revenue from the sector.

Property owners are advised to keep themselves updated on the latest developments in the field of property tax and to make their payments on time to avoid any penalties or legal consequences.