MONDAY JUNE 11: Registration, transfer of property: Centre to make 0.25 percent withholding tax mandatory

ISLAMABAD: The federal government is expected to introduce a major amendment in the Finance Bill 2012, making it mandatory for all authorities responsible for recording and registration of transfer of immovable property to withhold a minimum amount of 0.25 percent tax at the time of registration or transfer of property.
Sources told Business Recorder on Sunday that the amended Finance Bill (2012-2013) will incorporate a new provision in the law for the smooth implementation of the CGT on immovable property from July 1 this year. Through amended Finance Bill, it would be compulsory for the transferring authorities, including provincial registrars, housing authorities, co-operative societies and other local property registration authorities, to withhold 0.25 percent of the sale proceeds of the immovable property for communicating this information to the federal tax authorities.
This 0.25 percent withheld tax would be adjustable against the CGT proposed to be levied under the Finance Bill (2012-2013) at the rate of 5 or 10 percent, respectively. The FBR will use the data of the transferring authorities for collect of the CGT on the sale of the immovable property.
The Federal Board of Revenue (FBR) will issue separate rules for determination of gains on the sale of property for the imposition of the CGT on immovable properties. The levy of tax on capital gain on the disposal of immovable property will also be explained in the FBR's rules, sources added.
Sources said that the provincial registrars of the property and all other transferring authorities such as housing societies, etc., would be required to withhold a small percentage of tax at the time of registration or transfer of property. The provision would be introduced through an amendment in the Finance Bill (2012-2013) and Finance Act 2012 would incorporate mandatory provision for the registration authorities. The new provision for the transferring authorities will be applicable from July 1 this year as soon as the amended Finance Bill is approved by parliament.
The scheme's purpose is to ensure proper deduction and collection of the CGT on immovable property. The information about the deduction of tax would be provided to the FBR on regular basis. It would be compulsory for all kinds of transferring authorities to provide relevant data to the FBR. In the presence of timely information about such transactions, the FBR will not only be able to document buyers and sellers of properties but also collect CGT on immovable properties. This is the most effective way to document buyers and sellers of immovable properties across the country and collect the CGT on sale of such properties.
As far as working out the gain for the imposition of the CGT on immovable properties, the FBR wills draft detailed rules after passage of the budget by parliament. The deduction of minimum amount of tax on transfer of property would be started from July 1 this year whereas sellers would provide details of CGT in their income tax returns in September 2013.
The FBR had proposed 10 percent CGT would be applicable on sale of property within one year of the date of the acquisition of property; 5 percent CGT on sale of property within 2 years and no CGT applicable on sale of property beyond two years. Thus, there would be no capital gains tax on gains arising out of the sale of immovable property or immovable assets that would be sold after two years of purchase, sources added.
The ongoing meeting of the Senate's Standing Committee on Finance had recently proposed the FBR to formulate rules on assessment of value of assets or immovable property in consultation with all provinces for imposition of the CGT. The CGT on sale of immovable property within one or two years would help discourage speculation in real estate sector as well as unjustified increase in prices of properties. The FBR officials also informed the committee that CGT on immovable property would be adjustable against the final income of taxpayers.
Taxpayers, who would be filing their income tax returns, would get this CGT adjusted against their final tax liability. A tax expert was of the view that this withholding tax may turn out to be excessive as the tax withheld may not commensurate with the tax levied on capital gains at the rate of 5 percent or 10 percent as the case may be. For example a property sold for Rs100 million, the tax withheld at the rate of 0.25 percent would be Rs250,000. If the property is being sold in one year the tax would be 10 percent. This means that the tax withheld would result into a gain of Rs2.5 million. Similarly, if it is sold after a year and less than two years, the gain would work out to be as much as Rs5 million. In this way, the gain on the sale of immovable property may not be as much as is being assumed for the purpose of withholding tax. Thus, the rate of withholding should be minimised at the rate of 0.1 percent and not 0.25 percent, tax experts suggested.