Pakistan property tax 2016 – Everything you need to know
Property taxes in Pakistan were amended in the annual budget 2016-17. These amendments and property taxes were then passed by the parliament. But real estate stakeholders rejected the new amendments. The government, FBR and real estate stakeholders decided to negotiate and finalize the property taxes in Pakistan. After weeks of discussion between government / FBR and real estate representatives, issues of property valuation and property taxes have been finalized as mutual consensus has been reached. The new amendments have been passed through Presidential Ordinance by President of Pakistan Mamnoon Hussain. So the stalled real estate activities and registry of properties will resume according to the new amendments from Monday 1 August 2016. According to the new Pakistan property tax amendments:
Finance Act 2016-17 | Property tax rates in Pakistan
FBR will determine the real estate prices | 2-10 times increase in property rates
In Pakistan rates of immovable properties were decided by the commissioner and property taxes were subjected according to the DC Rates. Now according to Finance Act 2016 it has been changed. Now properties will be evaluated by Federal Board of Revenue, FBR. Now all property taxes will be subjected to new property rates set by FBR. All parties agreed to hike 2-10 times the property rates from current DC Rates. The parties further agreed to bring rates closer to fair market value in few years. Stamp Duty (SD), Capital Value Tax (CVT), Withholding TAX (WHT) & Capital Gain Tax (CGT) will be calculated according to new property value set by FBR.
(Stamp Duty (SD) and Capital Value Tax (CVT) is paid only by the purchaser of immovable property at the time of registry – These taxes are collected by the provincial governments and have little variation).
Withholding tax (WHT)
The government / FBR has increased the withholding tax threshold. According to new taxes, withholding tax (WHT) will be applicable on properties worth 4 million rupees or more. Withholding period has also been increased to 5 years.
WHT FOR SELLERS OF IMMOVABLE PROPERTY
1% WHT on sale of property for filers
2% WHT on sale of property for non-filers
0% WHT on sale of properties after 5 years of purchase
WHT FOR BUYERS OF IMMOVABLE PROPERTY
3% WHT on purchase of property for filers
4% WHT on purchase of property for non-filers
Capital Gain Tax (CGT)
CGT ON PROPERTY TRANSACTIONS BEFORE I JULY 2016
For past transactions, 5% CGT is applicable on all properties purchased before 1 July 2016 and sold out within 3 years.
CGT ON PROPERTY TRANSACTIONS AFTER 1 JULY 2016
10% CGT on sale of properties within 1 year of purchase
7.5% CGT on sale of properties within 2 years of purchase
5% CGT on sale of properties within 3 years of purchase
0% CGT on sale of properties after 3 years of holding period
0% CGT to be paid by the relatives who were issued plots of the Martyrs / Shuhadas
50% tax relaxation for the government employees
Profit on sale of immovable property = Capital Gain
Capital Gain = Price of property at the time of sale – Price of property at the time of purchase
Capital Gain on property sold for 100 Lac with purchase value 20 Lac (Purchase value as per DC Rates & Sold Value as per FBR or new rates)
Capital Gain = 100-20 = 80 Lac Profit
Tax on property profit = Capital Gain Tax = CGT
According to new CGT calculations | On profit of 80 Lac
10% CGT on sale of property within 1 year of purchase = 8 Lac
7.5% CGT on sale of property within 2 year of purchase = 6 Lac
5% CGT on sale of property within 3 year of purchase = 4 Lac
0% CGT on sale of property after year of purchase = 0
(Property price is not what the market value is but the price determined by FBR. At the moment FBR will start taxing real estate transactions according to 50% plus minus of the fair value of property – But in future like 3-4 years time, all taxes will be collected according to the original value of the property AKA FAIR MARKET VALUE or the price on which property is being sold)
Tax on rental income
According to Pakistan real estate tax 2016, no tax is applicable on rental income if the total amount is less than Rs 200.000 per year and owner has no other income source than the rental income. The rental income of Rs 200,000 or above is to be taxed. Tax slab on rental income is:
Annual rental income 2-6 Lac = 5% of the gross amount
Annual rental 6-10 Lac = Rs 20,000 plus 10% of the gross amount
Annual rental 10-20 Lac = Rs 60,000 plus 15% of the gross amount
Annual rental above 20 Lac = Rs 210,000 plus 20% of the gross amount
Tax on incomes of builders & developers
According to new property tax law in Pakistan, incomes of developers is subject to taxation. Taxes will be collected from builders according to the rates fixed for different cities. According to new rates, builders have to pay per foot rate for commercial and residential property according to different cities.
Winners and losers of new property taxes
Real estate agents and investors are at disadvantage
Due to the new property taxes, started from 1 July 2016, real estate activities have stalled, as this has reduced the day trading in real estate sector. Even sure deals have been cancelled and people are reluctant to sell or buy properties. Due to high CGT on selling the properties within 1 year of purchase, people will hold the properties for longer time period and that will limit the real estate transactions. This will severely affect the income of real estate agents who thrive on high property transactions. Similarly, investors are withdrawing their investments as no more juice is left in the real estate sector.
Genuine home buyers are at advantage
Due to the new property taxes, property prices are decreasing in many areas, especially where empty plots are in abundance and speculation is high. According to many experts, investors are withdrawing their investments to invest in more promising sectors like Pakistan Stock Exchange, which is one of the top 10 best performing stock exchanges of the world. Due to this we will see sharp decrease in property prices which is very good for real home buyers. Genuine buyers will be able to afford properties due to low prices.
Effects of new property taxes on Pakistan real estate sector
There are both positive and negative effects on the real estate sector due to the recent changes in property tax system. On negative side, real estate sector will see reduced transactions as investments will move out to other sectors. According to one realtor of DHA Lahore, file transfer has declined since July 1, 2016. Before the new evaluation system, on average 100 files were transferred in DHA Lahore on daily basis. On positive side, black-money will be checked and real estate sector will properly contribute in the national revenue. Another plus of new property taxes is the relief for general public, as properties will be more affordable in the near future.
Pakistan property market after new taxes
Until now what we have seen in the real estate market is the abnormal trends. Property prices have increased by 500% since 2009. Due to the new property taxes, property prices will first crash, then stagnant and finally we will see gradual price rise. This trend is in fact good for real estate sector as we will not see another property bubble. Pakistan property crash of 2005 was the worst nightmare for the investors, when many lost more than 50% of their investments. Property boom and bust will soon be a history in Pakistan as real estate sector has entered in new era of stability.
For investor there are still very attractive investments. In Pakistan many real estate developers offer residential and commercial projects on installments. These real estate developments are great for property investment due to two major reasons. Firstly, buyers don’t have to pay the total amount but in installments, so loss is minimum even if prices crash. Secondly, due to depreciating Pakistani Rupee, buyer will pay less but property worth will be more after the completion of installments duration. Therefore, real estate projects on installments are still the best option for property investment.
FBR latest valuation rates of immovable property in major cities (Click on the below links for details)