Updated on January 13th, 2023
Finally, Pakistan’s long-awaited budget for 2022-23 has arrived, and as expected, the Finance Bill 2022-23 has made some important policy changes, primarily related to the real estate sector. The Federal government has imposed new taxes of Rs 440 billion in the budget for the next financial year 2022-23, focusing on the real estate sector.
In a media briefing, Chairman FBR Asim Ahmed said that the Federal Board of Revenue has proposed a new tax of Rs 440 billion, including Rs 34 billion in customs duty, Rs 90 billion in sales tax and federal excise duty and Rs 316 billion in income.
If you are confused about how the new budget will affect the real estate sector, I will try to clarify most of them in this blog.
Real Estate Sector or Budget 2022-23
To understand the real impact of the tax on the real estate budget in 2022-23, we need to divide the real estate sector into 3 parts. The government has done the same. This is mainly done to promote certain classes in real estate and to discourage investment in others. Although some policies affect all three categories, others do not and that is why we need this segmentation, as it will help us understand where to invest in the coming year.
- Plots and files department where there are no constructions on the ground.
- Construction sector such as houses etc.
- High-rise apartments etc.
The Government of Pakistan has announced three major policies in the Budget 2022-23 to tax these sections. Don’t worry if you don’t understand them right now, as I explain them one by one:
- The withholding tax has been revised for all three categories.
- Real estate assets will be taxed based on rental income estimated at more than 25 million.
- The Capital Gains Tax and its implications have been revised for all of the above categories.
Increase in Withholding Tax
Withholding tax is paid to the property buyer before transferring the plot to his name. This is the only common factor that will affect all three real estate sectors equally. In Budget 2022-23, the government has increased the holding tax for filers to 2% and non-filers to 5% from 1% and 2% for former filers and non-filers.
This is a significant increase, especially for non-fillers. This will significantly increase the cost of the transfer of plots. Let’s assume that any property in Pakistan whether it is a plot, house or flat has an FBR value of Rs. 10 million, then the change in holding tax will be as follows:
| According to previous rates | According to new rates |
| Filers pay 1 lac rupees as tax | Filers pay 2 lac rupees as tax |
| Non-filers pay 2 lacs in taxes | Non-filers pay 5 lacs in taxes |
Withholding Tax Impact on Real Estate
In general, an increase in withholding tax means an increase in transfer costs, and the real estate market sees an increase in transfer costs as a negative factor for real estate.
However, in this case, I do not see it as a major factor influencing or triggering the downturn in real estate. This is a one-time cost and although it will discourage short-term trading, it will be acceptable to most investors.
Capital Gain Tax and its Effects
This is where the tax policies for the three parts of real estate that we explained at the beginning of this blog are different. Let’s first understand what CGT is, CGT stands for Capital Gains Tax, this tax is applicable only if you have earned a return on your property investment.
Plots/Files
- 15% CGT where the holding period does not exceed 1 year.
- 12.5% CGT where the holding period is between 1 and 2 years.
- 10% CGT where the holding period is between 2 and 3 years.
- 7.5% CGT where the holding period is between 3 and 4 years.
- 5% CGT where the holding period is between 4 and 5 years.
- 2.5% CGT where the holding period is between 5 and 6 years.
- 0% CGT where the holding period is more than 6 years.
Home/Built-in Property
- 15% CGT where the holding period does not exceed 1 year.
- 10% CGT where the holding period is between 1 and 2 years.
- 7.5% CGT where the holding period is between 2 and 3 years.
- 5% CGT where the holding period is between 3 and 4 years.
- 0% CGT where the holding period exceeds 4 years.
Apartments/High-rise
- 15% CGT where the holding period does not exceed 1 year.
- 7.5% CGT where the holding period is between 1 and 2 years.
- 0% CGT where the holding period is more than 2 years.
Deem Rental Tax on Non-Productive Real Estate
It is now the new name of the wealth tax and the only real target of this tax is non-productive properties, such as plots and files. The FBR has levied 1% deem tax on unused/surplus property worth over Rs 25 million as per FBR value. This includes unused houses, plots, farmhouses, or any land worth more than 25 million but is not taxable. The government estimates that the income from such properties is 5% per annum, of which 20% will be taxed, which is 1% of its FBR value.
The biggest target of this tax is the richest of us who invest in dozens of plots that do not generate rental income and the houses that they rent out but do not declare their rental income.
The house you live in is exempt from this tax, and property worth 25 25 million is also exempt. Here are some important things to keep in mind about this Demand for Rental Income Tax:
- Your home is exempt from this tax.
- This will be levied on the collective FBR value of all your plots. For example, if you have 10 plots with a total FBR value of 100 M, the first 25 M will be exempt from tax and the remaining 75 M will be tax deductible. Will be taxed. 1% of FBR value which is 7.5 lakh per annum.
- If you have a built property, house or commercial that is not being rented out, you will have to pay a default rental income tax on it.
Deem Tax and its Effects
The plot sector will suffer the most as they do not generate any rental income and therefore will become a liability. Those who have accumulated this type of wealth can certainly pay taxes on this amount, but investing in non-rental properties in the future will certainly suffer greatly.
While for the lower middle and middle-class small societies can show some flexibility and show unaffected performance. Wealthy societies like DHA, and Bahria Town, where investors have invested heavily, will tremble. And once the big boys fall, it will affect small societies as well.
The focus is to prevent investors from owning more than 25 million non-productive assets such as plots, files, houses, farmhouses, etc.
