FBR valuation and DC rates: legalisation of differential sum sought through three percent tax

The government has decided to allow purchasers/investors of immovable properties to legalise/whiten the difference between the Federal Board of Revenue (FBR) notified values of immovable properties and DC rates/registered values on payment of 3 percent tax and the source of investment would be not be probed.
According to the commentary of Ashfaq Tola Senior Partner Naveed Zafar Ashfaq Jaffery & Co, Chartered Accountants on the Real Estate Registration Scheme issued here on Wednesday, further amendments have been proposed vide Income Tax Amendment Ordinance, 2016. In addition to the amendments introduced vide Income Tax Amendment Ordinance, 2016, enacted on July 31, 2016, further amendments to Income Tax Ordinance, 2001 are proposed to resolve the concerns of business and real estate community.
Ashfaq Tola informed Business Recorder that the differential amount between the FBR's prescribed tables of immovable properties and DC rates has been proposed to be legalised on payment of 3 percent tax. The facility would be available to the purchasers of the immovable properties.
The commentary of Senior Partner Naveed Zafar Ashfaq Jaffery & Co, Chartered Accountants said that under the Income Tax Amendment Ordinance, 2016, every person attesting or registering transfer of any immovable property is proposed to be made responsible for collection of advance tax at the rate of 3% from purchaser or transferee on amount calculated. It has also been proposed that the difference between registered value and value determined under section 68 shall not be considered for the purposes of section 111 ie the differential amount will not be charged as unexplained income and the amount, on which advance tax under section 236W has been paid, shall be allowed to be incorporated in books of accounts in tangible form.
Explaining the Income Tax Amendment Ordinance 2001, Ashfaq Tola said that the earlier, vide a circular letter no. 7(13), dated: June 29, 1993, the Board issued instructions regarding valuation of Immovable property by the Commissioners. The Board instructed that the values fixed by the provincial authorities should be made the basis of valuation.
It was proposed vide Finance Bill 2016 that fair market value of any property shall be determined without taking into consideration the value fixed or notified by any provincial authority.
However, FA 2016 altogether barred Commissioner from determining Fair Market Value of Immovable Property. The same was made to be determined on the basis of valuation made by a panel of approved valuers of the State Bank of Pakistan (SBP).
Capital Gain Tax Rates: Finance Act 2012 ("FA 2012") for the first time brought capital gain arising out of disposal of immovable property to tax subsequent to 18th constitutional amendment, wherein, entry number 50 in Federal Legislative List empowers the Federal Government to levy this tax.
Prior to FA 2016 and after FA 2012, capital gains on immovable property sold after holding up to one year and up to two years were charged to tax at the rates of 10% and 5%, respectively, whereas, capital gains on property sold after holding for a period of more than two years were exempt from tax, Ashfaq Tola said.
Finance Act 2016 levied capital gain tax at the rate of 10% on sale of a property held for a period up to five years, whereas, capital gains on property sold after holding for a period of more than five years were exempt from tax. A comparison of tax rate with previous years is provided below:

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Holding Period                          TY 2013 to TY 2016    TY 2017

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Upto one Year                                   10%               10%

More than one year but less than two years       5%                 -

More than two years but less than five years    Nil                 -

More than five years                            Nil               Nil

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B. Earlier Amendments vide Income Tax Amendment Ordinance, 2016
(July 31st, 2016):
1. Fair Market Value
-- The real estate sector strongly opposed the amendments introduced vide FA 2016, especially in section 68 of Income Tax Ordinance, 2001 ("ITO"), which resulted in further amendment in ITO after prolonged deliberations among Ministry of Finance, FBR, Tax Policy Experts, representatives from Real Estate Sector and other stack holders.
The amendments are as briefly described as under:
-- Amendment in section 68 of ITO was made and FBR was empowered to determine and notify the fair market values of the immovable property.
-- Furthermore, it was also made clear that following values shall not be less than the values determined for the purpose of stamp duty or by FBR, as the case may be:
-- Consideration received on disposal of property;
-- Value of property at the time of purchase; and
-- Valuation of property under section 111
This meant that the powers of district officer under rule 228 of Income Tax Rule, 2002 to fix a higher value of constructed property, than value under section 68 of ITO, for the purpose of section 111 of ITO, was curbed.
-- It was further explained that if the determined fair market value was different from auction price, the higher of the two values shall be applicable.
2. Advance Tax on Sale/Disposal or Purchase:
-- Moreover, the holding period for exemption from adjustable advance tax on sale or transfer of immovable property was reduced to 3 years from 5 years. Also, such advance tax was exempted if the seller is dependent of a Shaheed of Pakistan Armed Forces ("PAF") or of a person who dies while in the service of PAF or Federal and Provincial Governments. The advance tax was also exempted on first sale of property acquired or allotted as an original allottee, Senior Partner Naveed Zafar Ashfaq Jaffery & Co, Chartered Accountants said.
-- Limit for exemption of advance tax on purchase of immovable property was also enhanced from Rs 3 million to Rs 4 million.
3. Capital Gain Tax Rates:
-- Capital Gain Tax was exempted on sale of property if the seller is dependent of a Shaheed of PAF or of a person who dies while in the service of PAF or Federal and Provincial Governments. Capital Gain Tax has also been exempted on first sale of property acquired or allotted as an original allottee.
For the cases other than above, following Capital Gain Tax rates shall be applicable:
a. For property acquired on or after July 01, 2016.

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a. For property acquired on or after July 01, 2016

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Holding Period                                              Tax Rate

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Less than one year                                               10%

Equal to or more than one year but less than two years          7.5%

Equal to or more than two year but less than three years          5%

Equal to or more than three years                                 0%

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b. For property acquired before July 01, 2016

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Holding Period Tax Rate                                     Tax Rate

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Upto three years                                                  5%

More than three years                                             0%

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Capital Gain Tax rates was reduced by 50 percent in case of first sale of property acquired or allotted to ex-servicemen and serving personnel of Federal and Provincial Governments, being original allottee of the property.
C. Further amendments proposed vide Income Tax Amendment Ordinance, 2016
-- In addition to above amendments introduced vide Income Tax Amendment Ordinance, 2016, enacted on July 31st, 2016, following further amendments in Income Tax Ordinance, 2001 are proposed to resolve the concerns of business and real estate community.
1. Advance Tax on Purchase or Transfer:
-- Every person attesting or registering transfer of any immovable property is proposed to be made responsible for collection of advance tax at the rate of 3% from purchaser or transferee on amount calculated as under:
A - B
Where, A is the amount determined under section 68; and B is the amount recorded by the registering authority. The above tax collected shall not be adjustable.
2. Unexplained Assets:
-- It has also been proposed that the difference between registered value and value determined under section 68 shall not be considered for the purposes of section 111 ie the differential amount will not be charged as unexplained income and the amount, on which advance tax under section 236W has been paid, shall be allowed to be incorporated in books of accounts in tangible form, Senior Partner Naveed Zafar Ashfaq Jaffery & Co, Chartered Accountants explained.
Example: Mr A purchases an immovable property having registered value of Rs 5,000,000. The amount under section 68 is determined to be Rs 15,000,000. The amount of advance tax to be paid at the time of purchase/transfer shall be as follows:

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Under section 236K (Adjustable)    2% of 5,000,000        Rs 100,000

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