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New taxes on Real Estate Sector in Pakistan

New taxes on Real Estate Sector in Pakistan

New taxes on Real Estate Sector in Pakistan: Budget 2019 has brought drastic changes for Real Estate Industry and government seems hell bent to bring this business into banking channel and reducing the size of undocumented money. To curb this they have taken few steps, we will analyze these steps by examples and will compare it with previous years as to get a clear picture on where we as Real Estate community stand. Following are the bold changes that government has made in the 2019 budget.

  • Increment of FBR rates to 85% of Fair Market Value.
  • Reduction of Advance Tax 236K from 2% to 1%.
  • Removal of restriction from Non-filer to buy property.
  • Charge of gain tax on normal tax regime and increasing holding period to 10 years for open plots and 5 years for constructed property instead of 3 years.
  • All transactions relating to Real Estate must be done via banking channel.
  • Increment of Section 236C WHT tax on seller to 5 years instead of 3 years.
  • Abolishment of Section 236W.
  • Introduction of floating rate for Real Estate transaction by Sindh Govt.
  • Reduction in CVT from 2.5% to 1.5%
  • Reduction in Stamping from 2% to 1%
  • Introduction of new slabs for Rental Income from property.
  • Abolishment of exemption of withholding tax on purchase of property worth 4 million.

Above are the major changes in Budget 2019 for Real Estate Industry. Let’s translate them into the form of transaction to understand up-to how much amount we will be taxed on each transaction and compare it with previous year’s transactions to have a clear understanding where our Real Estate Industry stands now.

Following are few examples which will elaborate how these new taxes will impact the purchase transaction of “Built-up” and “Open plots”. We have taken tentative rates of FBR and DC (Sindh) in different scenarios in order to translate and compare taxes with current and previous years.

EXAMPLE NO 1 (BUILTUP):

Transfer expenses of a 500 yards Bungalow situated in DHA Karachi for Purchaser according to new Federal and Sindh Budget (Tentative)

  • In February 2019, FBR jacked up the Official rates to 60,000/sq. yard of built-up residential in DHA Karachi, this makes the value of a Double Story Bungalow 3 Crore rupees. We will increase the above valuation by 50% as instructed in “Asset Declaration 2019 “therefore making it 4.5 Crore as official value in this example.
  • In this example we are assuming the current DC values notified under Section 27-A dated 27/6/2016

FBR value (Tentative) of a 500 yards Bungalow = 45,000,000 (4.5 Crore) FBR Advance Tax 1% on Purchaser = 450,000

DC Value (Tentative) of a 500 yards Bungalow = 9,300,000 (93 Lac)

Total DC Taxes = CVT 1.5%, Stamping 1%, Registry 1% = Total 3.5 %

If we go by the newly floating rate introduced by Sindh Government in 2019 budget following will be the calculation:

Formula of Floating rate:

Value in the valuation Table/ Actual Value x (CVT + Stamping + Registry) 9,300,000/45,000,000 x 3.5% = 0.73%

0.73% is our floating rate, now we will multiply it with the value declared on Sale Deed. 45,000,000 x 0.73% = 325,500

Hence,

Total DC tax                       = 325,000/-

Total FBR tax                     = 450,000/-

Total Transfer Cost          = 775,500/-

COMPARITIVE STUDY:

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on August 2016 = 1,233,800/-

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on Feb 2019 = 1,733,800/-
Total Taxes on Transfer of 500 yards Bungalow in July 2019 by Example No 1 = 775,500/-

CONCLUSION:

If Federal government increases its FBR rates by 50% and Sindh government doesn’t

increase its DC values then the resulting taxes will be much lower as compared to taxes in previous years notified respectively by FBR on August 2016 and February 2019. This will attract people to show maximum value as official and will discourage tax evasion and
black/gray economy.

EXAMPLE NO 2 (BUILTUP):

If Sindh Government increases its DC values and notifies them at half the value of FBR rates then the resulting taxes will be as follows:

FBR value (Tentative) of a 500 yards Bungalow = 45,000,000 (4.5 Crore) FBR Advance Tax 1% on purchaser = 450,000

DC Value (Tentative) of a 500 yards Bungalow = 22,500,000 (2.25 Crore) Formula of Floating rate:

Value in the valuation Table/ Actual Value x (CVT + Stamping + Registry) 22,500,000/45,000,000 x 3.5% = 1.75%

1.75% is our floating rate, now we will multiply it with the value declared on Sale Deed. 45,000,000 x 1.75% = 787,500

Hence,

Total DC tax                        = 787,500/-

Total FBR tax                     =  450,000/-_

Total Transfer Cost          = 1,237,500/-

COMPARITIVE STUDY:

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on August 2016 = 1,233,800/-

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on Feb 2019 = 1,733,800/-
Total Taxes on Transfer of 500 yards Bungalow in July 2019 by Example No 2 = 1,237,500/-

CONCLUSION:

If Federal government increases its FBR rates by 50% from the (current table notified on February 2019) and Sindh government increases it DC values and notifies them at half the value of FBR rates then the resulting taxes will be similar to what they were at August 2016 resulting in same volumes of Real Estate transaction as were after August 2016.

EXAMPLE NO 3(BUILTUP):

FBR value (Tentative) of a 500 yards Bungalow = 45,000,000 (4.5 Crore) FBR Advance Tax 1% on purchaser = 450,000

DC Value (Tentative) of a 500 yards Bungalow = 45,000,000 (4.5 Crore) Formula of Floating rate:

Value in the valuation Table/ Actual Value x (CVT + Stamping + Registry) 45,000,000 /45,000,000 x 3.5% = 3.5%

3.5% is our floating rate, now we will multiply it with the value declared on Sale Deed. 45,000,000 x 3.5% = 1,575,000

Hence,

Total DC tax                       =  1,575,000/-

Total FBR tax                     = 450,000/-_

Total Transfer Cost         _= 2,025,000/-

COMPARITIVE STUDY:

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on August 2016 = 1,233,800/-

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on Feb 2019 = 1,733,800/-
Total Taxes on Transfer of 500 yards Bungalow in July 2019 by Example No 3 = 2,025,000/-

CONCLUSION:

If Federal government increases its FBR rates by 50% from the (current table notified on

February 2019) and Sindh government brings its DC rates at par with FBR then the resulting taxes will 291200/- higher than taxes that were being slapped on February 2019.

It is very important that either Sindh government reduces it tax rates or does not bring it DC values at par with FBR rates to keep the tax ratio at a bearable threshold. Goal should be to encourage people to go for documentation not tax evasion. Ideally, taxes should not be more than 2% by both Federal and Provincial governments.

EXAMPLE NO 4 (OPEN PLOT) :

FBR value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore) FBR Advance Tax 1% on purchaser = 315,000

DC Value (Tentative) of a 500 yards Open plot = 5,800,000 (58 Lac) Total DC Taxes on open plot= CVT 1.5%

If we go by the newly floating rate introduced by Sindh Government in 2019 budget following will be the calculation:

Formula of Floating rate:

Value in the valuation Table/ Actual Value x CVT 5,800,000/31,500,000 x 1.5% = 0.28%

0.28% is our floating rate, now we will multiply it with the value declared. 31,500,000 x 0.28% = 88,200/-

Hence,

Total DC tax                       = 88,200/-

Total FBR tax                     =  315,000/-

Total Transfer Cost         _= 403,200/-

COMPARITIVE STUDY:

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on August 2016 = 394,375/-
Total Taxes on Transfer of 500 yards Bungalow notified by FBR on Feb 2019 = 1,021,125/-
Total Taxes on Transfer of 500 yards Open Plot in July 2019 by Example No 4 = 403,200/-

CONCLUSION:

If Federal government increases its FBR rates by 50% and Sindh government doesn’t

increase its DC values then the resulting taxes will be much lower as compared to taxes in previous years notified respectively by FBR on August 2016 and February 2019. This will attract people to show maximum value as official and will discourage tax evasion and
black/gray economy.

EXAMPLE NO 5 (OPEN PLOT) :

FBR value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore) FBR Advance Tax 1% on purchaser = 315,000

DC Value (Tentative) of a 500 yards Open plot = 15,800,000 (1.58 Crore) Total DC Taxes on open plot= CVT 1.5%

If we go by the newly floating rate introduced by Sindh Government in 2019 budget following will be the calculation:

Formula of Floating rate:

Value in the valuation Table/ Actual Value x CVT 15,800,000/31,500,000 x 1.5% = 0.75%

0.75% is our floating rate, now we will multiply it with the value declared. 31,500,000 x 0.75% = 237,000/-

Hence,

Total DC tax                       = 237,000/-

Total FBR tax                     = 315,000/-

Total Transfer Cost         _= 552,000/-

COMPARITIVE STUDY:

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on August 2016 = 394,375/-
Total Taxes on Transfer of 500 yards Bungalow notified by FBR on Feb 2019 = 1,021,125/-
Total Taxes on Transfer of 500 yards Open Plot in July 2019 by Example No 5 = 552,000/-

CONCLUSION:

If Federal government increases its FBR rates by 50% from the (current table notified on February 2019) and Sindh government increases it DC values and notifies them at half the value of FBR rates then the resulting taxes will be quite close to the tax expenses in August 2016 and much less than the tax expenses in February 2019 upon transfer, resulting in same volumes of Real Estate transaction as were after August 2016.

EXAMPLE NO 6 (OPEN PLOT) :

FBR value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore) FBR Advance Tax 1% on purchaser = 315,000

DC Value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore) Total DC Taxes on open plot= CVT 1.5%

If we go by the newly floating rate introduced by Sindh Government in 2019 budget following will be the calculation:

Formula of Floating rate:

Value in the valuation Table/ Actual Value x CVT 31,500,000 /31,500,000 x 1.5% = 1.5%

 

1.5% is our floating rate, now we will multiply it with the value declared. 31,500,000 x 1.5% = 472,500/-

Hence,

Total DC tax                       = 472,500/-

Total FBR tax                     = 315,000/-

Total Transfer Cost         = 787,500/-

COMPARITIVE STUDY:

Total Taxes on Transfer of 500 yards Bungalow notified by FBR on August 2016 = 394,375/-
Total Taxes on Transfer of 500 yards Bungalow notified by FBR on Feb 2019 = 1,021,125/-
Total Taxes on Transfer of 500 yards Open Plot in July 2019 by Example No 6 = 787,500/-

CONCLUSION:

If Federal government increases its FBR rates by 50% from the (current table notified on February 2019) and Sindh government brings its DC rates at par with FBR then the resulting taxes will still be much lower than they were after new rates notified in February 2019 by the FBR.

It is very important that either Sindh government reduces it tax rates or does not bring it DC values at par with FBR rates to keep the tax ratio at a bearable threshold. Goal should be to encourage people to go for maximum documentation not tax evasion. Ideally, taxes should not be more than 2% by both Federal and Provincial governments.

Waheed Ensari
Waheed Ensari
Waheed focuses on modern techniques in order to management of businesses through finances, learning & development, IT.Its his appetite which draws his attention & energy in helping people (business owners/entrepreneurs) – to get the crystal aspects of the business.

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