KARACHI: Federal Board of Revenue (FBR) on Thursday said that about eight amendments have been introduced to Income Tax Ordinance, 2001 through Finance Act, 2016 regarding taxation of immovable properties in which withholding tax on transfer of property has been increased by 100 percent for filers and non-filers of income tax return.
The FBR said that amendments in respect of immovable properties had been made in Section 7C, 7D, 15, 15A, 37, 68, 236C and 236K of the Income Tax Ordinance, 2001.
Withholding Tax on Immovable Property:
Withholding tax was applicable on transfer of immovable property in the hands of a seller being filer at 0.5 percent and non-filer at one percent. Through Finance Act, 2016, this rate has been increased to one percent for filer and two percent for non-filer. The registration of immovable property shall not be less then value prescribed by the District Collector. Tax collected is adjustable against capital gains arising on disposal of such property. Moreover, this tax is applicable only if the immovable property was acquired within last five years, the FBR said.
The FBR further said that in the hands of the purchaser another withholding tax was applicable at the rate of one percent for filer and two percent for non-filer prior to Finance Act 2016. Through Finance Act 2016, the rate of withholding tax has been increased to two percent for filer and four percent for non-filer. The registration of immovable property shall not be less the value prescribed by the District Collector. The tax so collected is adjustable advance tax against the tax liability of the purchaser and if no liability exists the same can be refunded.
Taxation of Builders and Developers:
Income of builder or land developer was assessed on the net income basis where declared receipts were reduced by the claimed expenses. As these projects are on long term basis, therefore, provisional assessment on yearly basis on declared receipts was conducted which was followed by the appraisement at the end of the project. The FBR said sometime if construction is carried out under long term contracts the income tax assessed was on the basis of the percentage of completion method. However, due to non-documented economy receipts and expenses could not be verified and resultantly taxpayers inflated expenses and suppressed receipts and a very little revenue was contributed by this sector.
The FBR said that after amendments introduced through Finance Act, 2016, income of builder or land developer shall now be final taxation on the basis of specified rates based on cities and area of the property in respect of projects approved after July 01, 2016. For this purpose FBR shall prescribe rules regarding mode and manner of tax payment.
Capital Gain on Sale of Immovable Property:
Through Finance Act, 2016 gain arising on disposal of immovable property acquired within last five years has been made taxable at 10 percent. Previously it was taxable at a rate of five percent and 10 percent if the holding period was up to one year and two years respectively. However, there was no tax on gain arising out of immovable property where holding period was exceeding two years.
However, under the Ordinance, gain arising on the disposal of immovable property by a person in a tax year to a Rental REIT Scheme shall be taxed at the rate of five percent up to 30th day of June 2019, irrespective of the holding period.
Determination of Fair Market Value of Immovable Property:
Prior to Finance Act, 2016, fair market value for the purpose of probing the source of investment in acquisition of immovable property was determined by the commissioner. However, under the Income Tax Rules, fair market value was to be determined as value fixed for the purpose of collecting stamp duty by provincial revenue authorities and it was binding upon commissioner Inland Revenue. Now, the powers of commissioner have been withdrawn and valuation is to be made by a panel of approved valuers of State Bank of Pakistan. Similarly, the binding nature of the value determined by the provincial revenue authorities for the purpose of collecting stamp duty has also been withdrawn.
Property Income of Individuals and Association of Persons:
Through an amendment in Section 45 of the Income Tax Ordinance, 2001, the chargeability of tax on property income for an individual and AOP has been changed from ‘net income basis’ to ‘gross income basis’ as separate block of income for tax year 2017 and onwards. The gross rental receipts of individual and AOP shall be taxed at prescribed rates without allowing any deductions and allowances under Section 15A.
The tax deducted or deductible under section 155 in the case of individual and AOP shall constitute final discharge of tax liability.
A new tax card also has been inserted in First Schedule of the Ordinance, which prescribes the tax rates applicable to rental income of individuals and AOPs.
Similarly, withholding tax rates for rental payments to individual and AOPs have also been prescribed in the revised Table in the First Schedule. However, property income derived by an individual or AOP below Rs200,000 shall not be taxable if or individual or an AOP does not have income from any other head. The FBR said that this is effective from July 01, 2016 for individual and AOPs. Property income derived by companies shall continue to be taxed under the existing provisions as before.