‘Sellers of immoveable property to pay 0.5% advance tax, besides CGT

ISLAMABAD: Federal Board of Revenue (FBR) has clarified since Capital Gains Tax (CGT) ranging between 5 percent to 10 percent has been imposed only on disposal of properties held for a period up to two years therefore, advance tax at the rate of 0.5 percent is also to be collected from sellers who held the immoveable properties for a period up to two years.

Capital gains on immovable property: Prior to the 18th Constitutional Amendments effective from April 19, 2010 entry 50 of the Federal Legislative List contained in Part-I of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan empowered the Federal Legislature to levy taxes on the capital value of the assets, not including taxes on capital gains on-3-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 aforesaid 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position exemption to capital gains on the disposal of immoveable property held for a period up to two years was withdrawn by making amendments in section 37 of the Income Tax Ordinance, 2001 through the Finance Act, 2012. Simultaneously, a new Division was added in the First Schedule to the Income Tax Ordinance, 2001 giving the following rates of tax to be paid on capital gains from disposal of immoveable property.

Where holding period of Immovable property is up to one year the rate of tax would be 10 percent and where holding period of immovable property is more than one year but not more than two years tax rate to be 5 percent.

To overcome the administrative problems in respect of collection of CGT on disposal of immovable property and to keep a track of the transactions of immovable property adjustable advance withholding tax at 0.5 percent of the consideration received on sale transfer of immoveable property was levied on sellers transferors of immovable property under section 236 C of the Income Tax Ordinance, 2001.

It is clarified the advance tax to be collected under section 236 C has been introduced for the purposes of providing a mechanism for collection of CGT on disposal of immovable property. The actual quantum of capital gain and tax payable thereon is to be computed at the time of filing of return of income. Section 236 C is not an independent provision and does not operate in isolation. Since CGT has been imposed only on disposal of properties held for a period up to two years therefore, advance tax is also to be collected from sellers who held the immovable properties for a period up to two years. staff report