Among other taxation measures, Budget FY20 proposals for the property sector have been aimed at expanding the tax base and documenting the economy. Amid the confusion that surrounded a few proposals, the budget is largely being taken as a continuation of policy direction adopted in the last three years.
It has been proposed that the FBR property rates be raised to 85 percent of the market value. However, closing the gap between the FBR rates and market values of the properties had been undertaken by the previous government as well where the FBR and DC rates were abolished and replaced with increased property valuation table rates across 20 major cities of Pakistan. In some cases, these rates have been increased to 70 percent of the market value. Nonetheless, the latest proposal aims at further streamlining taxes.
Also, the government has also done away with the three percent additional tax that the property purchaser used to pay on the differential between FBR and DC rates to register the property. The rationale for doing away with this concession to the property buyer is that by only paying a minimal tax of three percent on the differential amount, the buyer could go scot free without explaining the source of funding. Withdrawing the tax aims at addressing this loophole, this means that now the property purchaser will have to explain the source of funds for financing the property. Also all transactions and real estate acquisitions will now have to be through banking channels with an additional charge of 5 percent of FBR value as a penalty otherwise.
The proposal that the government has lifted the ban on non-filers buying property valued higher than Rs5 million attracted a lot of hype – much of it was negative where the government was blamed for taking another U-turn from its earlier stance of brining the non-filers under tax net. However, what has actually happened that the government has completely removed the concept of any sort of facilitation to the non-filers. While the provision to allow the non-filers to buy property valued higher than Rs5 million has been introduced in the budget, what many missed was the fact that now, anyone who does not file income tax returns is liable to face investigation and inquiry apart from paying 100 percent more taxes in any sort of taxable transaction, which includes buying real estate property.
At another point, the budget has also proposed to reduce withholding taxes on transfer costs that are likely to do away with the distortion that treated the tax filers unfairly. The WHT regime now seems simplified. WHT on the purchase of property has been reduced from two to one percent of its total value. Also, the ceiling of Rs4 million for WHT on the purchase of property has now been abolished with WHT now imposed on all properties of all values. Moreover, a WHT of one percent is imposed on any property sold within 5-year period of purchase against the previous practice of no WHT on the sale of property sold three years of purchase.
The budget also proposes to bring the income from capital gains under normal tax regime at normal tax rates as against the current practice of taxing them separately on the basis of holding period. However, there is still some confusion around this proposal whether these gains will be charged as per the income tax slabs and at what rates.
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