1% Withholding Tax to be charged on purchase of all types and sizes of property

[Salman]

1% Withholding Tax to be charged on purchase of all types and sizes of property

1 percent and 2 percent for NTN holder and Non-NTN holder, respectively

ISLAMABAD: The government would charge one percent withholding tax on purchase of immovable property of all sizes, including plots, flats, houses, residential and commercial properties purchased at any time with effect from July 1, 2014.

Sources told Business Recorder here on Saturday that all sizes of immovable properties are covered under the withholding tax regime at the purchase stage through Finance Bill (2014). At the same time, there is no exemption from withholding tax on time period for purchase of immovable properties. The withholding tax would be collected at the time or registry or transfer of property. It is an adjustable tax and refund can be claimed on filing of income tax returns and wealth statements.

To document and bring into tax net the real estate transactions it has been proposed that an adjustable advance tax be collected on purchase of immovable property at 1 percent tax rate for complaint taxpayers and 2 percent for non-compliant persons. However, properties less than Rs3 million value and schemes introduced by the government for expatriate Pakistanis will be excluded.

Earlier, to overcome the administrative problems being faced in collection of Capital Gain Tax on disposal of immoveable property and to keep a track of the transactions of immoveable property adjustable advance withholding tax @ 0.5 percent of the consideration received on sale/transfer of immoveable property was levied on sellers/transferors of immoveable property under section 236C of the Income Tax Ordinance, 2001.

Advance tax collected under section 236C was introduced for the purpose of providing a mechanism for collection of capital gain tax on disposal of immoveable property.

The actual quantum of capital gain and tax payable thereon is to be computed at the time of filing of income return. Section 236C is not an independent provision and does not operate in isolation. Since Capital Gain Tax has been imposed only on disposal of properties held for a period of up to two years therefore, advance tax is also to be collected from sellers who held the immoveable properties for a period up to two years.

Prior to the 18th Constitutional Amendment Entry 50 of the Federal Legislative List contained in Part-I of the Fourth Schedule to the Constitution empowered the Federal Legislature to levy taxes on the capital value of the assets, not including taxes on capital gains on immoveable property.

The words “on capital gains” were omitted by the 18th Constitutional Amendment.

The effect of omission of these words is that the Federal Legislature cannot impose taxes on capital value of immoveable property but can levy tax on capital gains on disposal of immoveable property.

In view of the modified constitutional position exemption to capital gains on the disposal of immoveable property held for a period up to two years was withdrawn by making amendments in section 37 of the Income Tax Ordinance, 2001 through the Finance Act, 2012.

Earlier, the rate of advance tax was introduced at 0.5 percent, now it has been proposed in the Budget 2014 that it should be 1 percent and 2 percent for NTN holder and Non-NTN holder, respectively.