There is a serious anomaly in the newly introduced 'Form IT-5' for the sellers of immovable property for payment of 0.5 percent withholding tax under section 236C of the Income Tax Ordinance, 2001, as the said withholding tax is applicable on all property transactions whether subjected to the capital gains tax (CGT) or not.
Experts told Business Recorder here on Tuesday that section 236C (advance tax on sale or transfer of immovable property) of the Income Tax Ordinance 2001 has not mentioned any exemption from the said 0.5 percent withholding tax in cases where the property has been sold beyond the period of two years. Without specifically mentioning of the exemption on selling of period after two years in the Ordinance 2001, 0.5 percent withholding tax is now applicable on all kind of property transactions taking place even after period of two years.
The language of the law is very clear, withholding tax at 0.5 percent is applicable on all property transactions whether subjected to the CGT or not, however, there is only one exception provided under the law which is advance tax under section 236C shall not be collected in the case of Federal government, provincial government or a local government. In all other cases without any exception, it shall be deducted at the time of transaction; however, it shall be adjustable.
The IT-5 return form (application to the registering/transferring authorities for the sale/transfer of immovable property) has mentioned that 0.5 percent withholding tax is applicable in cases where CGT is applicable on property sold within a period of two years, apparently there is wrong application of law while devising Form IT-5.
Under Finance Act, 2012, the CGT on immovable property was introduced and gain arising on sale of such property within two years of acquisition shall be taxed. Where the holding period of immovable property is up to one year, the rate of tax would be 10 percent and where the holding period of property is more than one year but less than two years, the rate of tax would be 5 percent. On the other hand, 0.5 percent withholding tax under section 236C of the Ordinance, 2001 is altogether a different tax applicable on all kind of property transactions and even it is adjustable.
As per Form IT-5, 0.5 percent withholding tax would not be applicable in case where property is sold after two years of purchase. However, this has been merely mentioned in the Form IT-5 and section 236C of the Ordinance, 2001 is silent on the issue.
This means that the 0.5 percent withholding tax would be applicable on all property transactions whether subjected to the CGT or not. The purposes of taxing gain out of immovable property transactions is something else while controlling the undocumented sector to bring them into tax net through withholding tax provisions is totally a different proposition but the Tax department responsible for devising forms/returns seemed to be not applying the law in its true letter and sprits.
Sources said that it is a very serious ambiguity in the law because the Income Tax Ordinance 2001 has not given legal backing to the IT-5 return form which has exempted 0.5 percent withholding tax in case the property is being sold after a period of two years. This requires immediate amendment in the section 236C of the Ordinance, 2001 to specify that the property sold after two years would not be subjected to the 0.5 percent withholding tax or the Form IT-5 needs to be re-devised in accordance with the intention of the law makers.
Under section 236C of the Income Tax Ordinance 2001, (1) Any person responsible for registering or attesting transfer of any immovable property shall at the time of registering or attesting the transfer shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule to the Income Tax Ordinance, 2001; (2) The advance tax collected under sub-section shall be adjustable; and (3) The advance tax under this section shall not be collected in the case of Federal government, provincial government or a local government", it added.