Property tax is a tax paid on real estate owned by an individual or some legal entity such as a corporation. Many people try not to give their adequate share of this tax. If people realize the value of giving tax then they won’t stop filing their returns. Below are the different types of property tax in Pakistan:
- Capital Gains Tax (CGT)
- Capital Value Tax (CVT)
- Stamp Duty
- Withholding Tax or Advance Tax
Even though you’re not really happy about it, but taxes are important. However, you can get into serious trouble with the Federal Board of Revenue if you are seeking a way not to pay property taxes.
Read more: A Step-by-step Guide on Selling Property in Pakistan
FBR receives data about your earnings, the investments you have made and real estate purchases, every bit of data. In short, your every transaction is monitored by the FBR. After spending some time, FBR can easily compare your income with the tax return file. The moment they sense difference they will give you a notice or they will charge you a penalty fee. And if the case is very sensitive, they may freeze the assets.
What Is A Property Tax?
Property tax in Pakistan is a provincial tax imposed on the annual rental value of property, based on the respective provinces’ Urban Immovable Property Tax Acts. For every province, tax rates are different. It is either a flat rate, or a proportion of the annual value of the rental. Rental value does not mean that there is a need to rent the property out. It basically gives the government’s estimated value of how much rent would be created if the building had been let out. The rate of taxation for each province varies according to whether the property is leased out or self-occupied.
According to the Department of Excise, Taxation & Narcotics Regulation, Punjab, there is a 5 percent annual rental value applied as a levy. The annual rental value is determined by assessing properties, whether rented or self-occupied, residential or industrial, location, based on their nature. As per the Sindh Department of Excise, Taxation & Narcotics, it doesn’t matter whether or not the property is rented out. Tax is imposed at a rate of 25 percent of the annual rental value of the land.
Kinds of Tax on Sale of Property in Pakistan
While selling property you need to give Capital Gains Tax (CGT). It is a tax which needs to be paid on the gain of profits.
Capital Gains Tax (CGT)
Sellers are required to pay the CGT (Capital Gain Tax). As per the amendment in Income Tax Ordinance 2002 through the Finance Act 2020, the holding period and tax rate is now reduced on immoveable property. If a person purchase property for longer term that means he did not buy it to make profit and henceforth lower tax rate will apply however, if a purchaser holds property for a shorter time that means a higher amount of CGT received, and ultimately falls under higher tax rate category. You will now hold immovable property for no more than 4 years with the recent amendments, and the taxable capital gain percentages have been rationalized with respect to the holding duration. Details are as follows:
- The holding period for CGT has been reduced to 4 years.
- 100% of capital gains to be taxed if the holding period is less than 1 year.
- 75% of the capital gains to be taxed if the holding period surpasses 1 year but is less than 2 years.
- 50% of the capital gains to be taxed if the holding period exceeds 2 years but not 3 years.
- 25% of the capital gains to be taxed if the holding period exceeds 3 years but not 4 years.
- No CGT to be taxed after 4 years of holding period.
- There is no difference among plots and any constructed property.
The CGT rate of annual gains due to the sale of immovable property has also been reduced by half, which are as follows:
| Annual Gains in PKR | Rate of Tax on Value of Property Before Finance Act 2020 | Rate of Tax on Value of Property After Finance Act 2020 |
| Gains less than 5 million | 5% | 2.5% |
| Gains higher than 5 million but lower than 10 million | 10% | 5% |
| Gains higher than 10 million but lower than 15 million | 15% | 7.5% |
| Gains more than 15 million | 20% | 10% |
Meanwhile, selling ready to move in house and developed plots, the government normally charges around 5-20% Capital Gains Tax. However, with the introduction of new incentive for construction industry during COVID-19, those who want to sell their houses are not going to pay the CGT. Not only this the sales tax is also lowered with the association with provincial government.
Types of Tax on Property Purchase in Pakistan
Before buying property in Pakistan, you need to know everything related to this matter such as: Do you need to apply for a home loan? Do you have sufficient funds to support? And mainly how much tax is imposed while purchasing property. Before taking a big step, you need to ponder all your choices.
Purchasing Property tax in Pakistan
Capital Value Tax (CVT) & Stamp Duty
Many interested in buying land, before being owners of the property, bear in mind that they have to pay taxes. The Capital Value Tax (CVT) is a provincial tax which is levied at the time of the purchase of the property by the buyer. It is payable on the capital value of an asset purchased, as the name implies. In compliance with the Finance Act, 2006, the Capital Value Tax or CVT is enforced at the rate of 2 percent of the recorded value.
Property transferred as a gift, an exchange or the relinquishment of a property’s rights are all subject to Capital Value Tax. However, either as a gift or by inheritance, transfer of property between parents, spouse or any of your blood relatives has been ruled out. In cases where the value of the property is a gift or an exchange, or where the value of the property is not specified in the transaction, the value of the property is measured on the basis of the values defined by the valuation tables.
Federal Government recommended to eliminate the DC rates concept. Furthermore, recommendations were also made to lower the CVT and Stamp duty to 1%. However, the provinces have not adopted any of these guidelines so far. Therefore, the CVT and Stamp Duty total for urban property still stands at a total of 5 percent at present (2 percent CVT and 3 percent Stamp Duty). Basically, Stamp Duty is a tax levied on a legal document at the time of the purchase of a house. Under the Stamp Act 1899, 3 percent of the property’s DC rates are imposed on Stamp Duty.
Withholding Tax (WHT)
Apart from Capital Value Tax (CVT) and Stamp Duty, you also need to pay Withholding Tax (WHT). WHT is a federal tax which is payable by purchaser and buyer on property agreement.
These are the important note for WHT on property.
- For those who are tax filer, they need to pay 2%. Those who are non-filer need to pay 4% while buying house.
- If the property is valued more than 4 million, then the WHT is applicable.
- The one who is selling his property is liable to pay 1% if he is a tax filer or 2% for non-filers.
- WHT needs to be paid at the time of registering the sales deed.
WHT is considered to be an ‘advance tax,’ which suggests that it serves as an advance on other taxes and can thus be balanced into the tax obligations of the homebuyer and even against the seller’s Capital Gains Tax.
Furthermore, Sellers would no longer have to pay Advance Tax after the termination of FBR rates, and rates would change for purchasers as well. However, the government has created the Directorate of Immovable Property (DGIP) to ensure that the stated values of property remain fair. In the Finance Act 2018, the proposal for developing DGIP was announced. Geo-mapping of plots, apartments and all kinds of housing schemes and projects would be regulated under this. The valuation of properties will be calculated as well. It will also monitor certain real estate areas where tax avoidance is a possible, particularly when withholding taxes are collected.
