Valuation of real estate for the purpose of taxation

Valuation of real estate for the purpose of taxation

Valuation of real estate for the purpose of taxation: A major initiative to correct the valuation of real estate for the purpose of taxation has been taken through the Finance Act 2018, whereby Government has introduced a new section 230F to the Income Tax Ordinance 2001.

Sub-section (1) of Section 230F of the Ordinance provides for the establishment of a new Directorate General of Immovable property (DG-IP).

This new office will be endowed with the necessary capacity and legal jurisdiction to establish and implement a framework for taxation of immovable property.

Sub-section (3) empowers the Directorate General to undertake proceedings for acquisition of property for reasons and purposes enumerated in sub-section (4).

As per this sub-section, the proceedings under sub-section (3) shall be initiated, where the Director General, on the basis of valuation made by it, has reason to believe that any immovable property of a fair market value has been transferred by a person (transferor), to another person (transferee), for a consideration which is less than the fair market value of the immovable property and that the consideration for such transfer as agreed to between the transferor and transferee has been understated in the instrument of transfer for the purposes of:

(a) the avoidance or reduction of withholding tax obligations under this Ordinance;

(b) concealment of unexplained amount referred to in sub-section (1) of section 111 representing investment in immovable property; or

(c) avoidance or reduction of capital gains tax under section 37.

The valuation mechanism (appointment of valuator and its working), is to be prescribed. Sub-section (8) restricts the period for initiation of proceedings within six months of the transfer of immovable property.

The manner of proceedings, opportunity of being heard for transferor and transferee and making of the final order for acquisition of property are the subjects covered under sub-sections (9) to (11).

The appellate procedures against the orders of the DG-IP are specified in sub-sections (12) to (18).

If the order of DG-IP, made under sub-section (11), survives the test of appellate forums, the immovable property and all rights including ownership rights therein shall be vested in the Federal Government with same rights and enjoyments as would have persisted under the previous ownership in terms of sub-section (19) of the newly inserted section 230F of the Ordinance. Sub-section (20) provides for payment to the owner of ‘consideration for acquisition’, which is defined in sub-section (21) as twice the price at which the transferor and transferee have executed the transfer of property which is the subject of proceedings.

The aim of the Federal Government is to make correct assessment of fair value of the property for the purpose of raising tax demands. However, as per sub-section

(22), the new provisions including the appointment of Directorate General will come into force on the date as notified by the Federal Government. Considerable preparatory work has to be done before this notification can be issued.

This includes necessary notifications regarding funds, valuation mechanism, appointment of appellate authorities and consultations with the provinces for requesting them to withdraw their valuation tables and reducing their tax rates on property transaction. Accordingly, sub-section

(22) provides that the provisions of section 230F shall remain inapplicable unless a notification by the Federal Government is issued.

After the issuance of the notification, provisions of the existing sections 111, 236C and 236W shall not apply whereas rates under section 236K shall be reduced to 1%.

However, till the date of issuance of the said notification, tax required to be collected under section 236C, 236I  and 236W shall continue to be collected, Moreover, provisions of Section 111 shall also continue to be applicable.

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