The Revenue Advisory Council (RAC) of Federal Board of Revenue (FBR), it is reported in the Press, has recommended imposition of Capital Gains Tax (CGT) on the sale of immovable property. Member Legal, FBR has reportedly obtained "favourable" (sic) opinion from the Law and Justice Division of Ministry of Law, Justice and Parliamentary Affairs that after the 18th Amendment, the Federal Government can levy CGT on the sale of immovable property.
In light of the recommendation of Member Legal, RAC has asked the FBR to propose to the government methodology of the imposition of CGT on immovable property. In the past, a group working on tax reforms proposed to the government to impose 10 percent CGT on the sale of immovable property after excluding the impact of inflation, depreciation of the rupee and actual price paid on the purchase from the present market price. FBR is of the view, that the real issue in the imposition of CGT is not constitutional, but the correct valuation of immovable properties as sellers and buyers conceal the actual payment - in many cases, sale deeds are three times lower than the fair market value of actual transaction.
In Business Recorder of June 29, 2011, it was reported that on the request of FBR, the Law and Justice Division opined that after amendment in Entry No 50 of Federal Legislative List through the Constitutional 18th Amendment Act, 2010, the levy of tax on capital gain on the disposal of immovable property would fall within the domain of the federal legislative list. Accordingly, the FBR, it is reported, is considering tabling a new Bill [Income Tax Amendment Bill 2011] before the Parliament for levy of CGT on immovable property, including agricultural lands.
According to FBR, prior to the amendment in Item No 50 of the Federal Legislative List of Fourth Schedule to the 1973 Constitution through 18th Amendment, the National Assembly had no power to levy capital gains tax on disposal of immovable property. But after the 18th Amendment in Constitution, they claim, the right to levy capital gains tax on immovable property rests with the federal government.
Item No 50 of the Federal Legislative List, as amended, reads as under:
-- "50. Taxes on the capital value of the assets, not including taxes on immovable property". Prior to the amendment, the language of Item No 50 of the Federal Legislative List was:
-- "50. Taxes on the capital value of the assets, not including taxes on capital gains on immovable property".
In the light of omission of words "capital gain", the FBR sought the opinion of Law and Justice Division about its scope and import. According to FBR's sources quoted in the press, the Law and Justice Division endorsed FBR's point of view that after amendment in Entry No 50 of Federal Legislative List through the 18th Constitutional Amendment Act of 2010, the levy of tax on capital gains on the disposal of immovable property had become federal subject and now National Parliament could legislate on it.
At present, gain on disposal of immovable property falls outside the ambit of Income Tax Ordinance, 2001. Section 37(5)(c) of the Income Tax Ordinance, 2001 says that "capital asset" does not include any immovable property. However, after interpretation of amended Item No 50 of the Federal Legislative List by Law and Justice Division, according to press reports, the FBR is considering removal of this provision to bring gain on disposal of immovable property, including agricultural lands, within the ambit of income tax.
The FBR is also reportedly considering adding a new section 236C in the Income Tax Ordinance, 2001 for collection of tax from the seller at the time of transfer of property at the rate to be provided in the First Schedule. The FBR is of the view that capital gains tax on disposal of immovable property would help in the broadening of tax base and substantially enhance revenue. "It would play a major role in plugging one of the loopholes for whitening untaxed money in the name of capital gain. The imposition of the CGT on immovable property is in line with the principle that every income is taxable unless specifically exempted. It would also bring stability in the prices of immovable property conveying healthy message to the masses," FBR sources claim.
The aspect that has escaped the attention of FBR and Law and Justice Division is that amendment in Item No 50 of the Federal Legislative List through 18th Constitutional Amendment, in fact, debars the federation to levy any kind of tax on immovable property. Therefore, the Capital Value Tax (CVT) stands transferred to the provinces. If federation cannot levy any tax on immovable property, how can it tax "capital gain" arising out of immovable property?
The erstwhile Wealth Tax Act, 1963 was levied under Item No 50 of the Federal Legislative List and imposition was challenged under Article 199 of the Constitution. The matter went up to the Supreme Court. In its decision reported as Haji Mohammad Shafi and Others v Wealth Tax Officers and Others 1992 PTD 726, the Supreme Court held that Parliament under Item No 50 of Federal Legislative List was competent to levy wealth tax on the value of assets. It was held that the manner in which valuation of any immovable asset was made could not be termed "tax on capital gain". Before the amendment in Item No 50 of Federal Legislative List by the 18th Amendment, the federation was barred from taxing "capital gain on immovable asset." Now this bar has been extended to "taxes on immovable property".
One wonders, how FBR and Law and Justice Division by just omission of words "capital gains" in Item No 50 of the Federal Legislative List have concluded that right to taxation has been shifted to the federal government. They have failed to see that second part of Item 50 is couched in negative phrase. The FBR and Law Division are required to revisit their opinion and read the law in its proper context and in the light of judgement of Supreme Court in Haji Mohammad Shafi and Others v Wealth Tax Officers and Others 1992 PTD 726.
The phrase "not including taxes on immovable property" in Item 50 cannot be read to "include taxes on capital gains on immovable property". To inquire the intention behind this amendment, proposed by the Parliamentary Committee on Constitutional Reforms, they can refer the matter to its Chairman, Senator Mian Raza Rabbani.
From the plain reading of Item No 50 of Federal Legislative List, as it stands after the 18th Amendment, it transpires that the National Parliament can levy taxes on capital value of movable assets but has no authority to levy taxes, including capital gains tax, on immovable property. It is obvious that taxes include tax on capital gains. How the FBR and Law and Justice Division has read plain language of Item No 50 of Federal Legislative List speaks volumes about their level of competence - no wonder why we have so much chaos in revenue and legal matters!
The rich and mighty landowners, through the 18th Amendment, have deprived the Parliament from levying even wealth tax on their collossal immovable property - on agricultural income, they are already not paying any income tax. It appears that FBR and Law Division are misreading the amended Item No 50 of the Federal Legislative List. FBR must consult some experts and should not entirely rely on Law and Justice Division.
(The writers, tax lawyers and legal historians, are Adjunct Professors at Lahore University of Management Sciences.)