FBR LOST ITS MIND – PAKISTAN BUDGET 2024-25 REAL ESTATE TAXES
FBR LOST ITS MIND – PAKISTAN BUDGET 2024-25 REAL ESTATE TAXES
Finally, the budget for 2024-2025 has arrived, and once again, it manages to ridicule any rational economic framework. It brings several tax changes across various sectors, but we will zero in on real estate taxes. Kudos to the economic team for proving, yet again, their commitment to injecting unpredictability into the market and baffling people annually with pointless tweaks that neither generate significant revenue nor hold any real meaning. But hey, something must be done every year to scare the bejesus out of investors—because who needs stability when you can have chaos?
The sole purpose of these real estate taxes appears to be serving one agenda: “create confusion and chaos.” It’s truly delightful to watch everyone scramble to understand the new changes, only for some genius at the top who is already planning to introduce even more tweaks in the 2025-26 budget, ensuring there’s always a fresh layer of confusion. After all, stability is just so dull.
Summary
- Capital Gains tax slabs have been eliminated and now, irrespective of the holding period you will have to give fixed capital gains.
- The new capital gains regime will apply only to the people who are going to buy any property after 1st July 2024.
- 236C and 236K have been revised slightly upwards only for transactions above 50 M and 100 M.
- 236C will be applicable on the FMV (Fair Market Value) or the value mentioned in the agreement to sell, whichever is higher.
- A new taxation slab for late filers who are irregular about filing their returns has been introduced.
- 3% FED tax has been applied to new societies and projects.
1. Capital Gain Tax Changes
First up, let’s talk about the capital gain tax on properties. Previously, this real estate taxes was based on a slab system with different rates depending on how long you held the property before selling it. But now, the budget introduces a flat rate:
- Flat Rate for Filers: 15% for 6 years of holding period, and thereafter it is not applicable.
- Flat Rate for Non-Filers: 45% for 6 years of holding period, and thereafter it is not applicable.
New Proposal: Starting July 1, 2024, if you acquire property, you’ll face a capital gain tax of 15% if you’re a filer and up to 45% if you’re a non-filer. Properties bought before June 30, 2024, will follow the old capital gains tax rules.
What This Means for You
The biggest beneficiaries of the previous capital tax regime were apartment buildings, etc however, now all property, regardless of whether it is a plot or a constructed property, will be taxed under one slab. Additionally, the tax is fixed for a period of 6 years and capital gains tax will not apply in the seventh year.
No matter what someone says, 15% tax is pretty reasonable. However, if you don’t file your taxes, you’ll face a hefty 45% tax, pushing you to start filing or just keep playing in the grey to avoid capital gain taxes.
How the Market Might React
This should not have a major impact on the “real” real estate market, as capital gains tax is based on the profit you are making on your property and is not something someone will have to give out of pocket. However, plots and files, or markets where short-term real estate trading is the norm, will suffer enormously due to this tax. The only way to escape this tax is by leveraging time and selling properties in the 7th year or not showing any profits.
2. Progressive Withholding Tax (Sections 236K and 236C)
Next, let’s discuss withholding tax. This Real Estate taxes is now linked to the transaction value of properties. Here are the new rates:
Purchase of Immovable Property (236K)
| Taxpayer | Property Value up to PKR 50 million | Property Value from PKR 50 million to PKR 100 million | Property Value above PKR 100 million |
|---|---|---|---|
| Filers | 3% | 3.5% | 4% |
| Late/Delayed Filers | 6% | 7% | 8% |
| Non-Filers | 12% | 16% | 20% |
Sale of Immovable Property (236C)
| Taxpayer | Property Value up to PKR 50 million | Property Value from PKR 50 million to PKR 100 million | Property Value above PKR 100 million |
|---|---|---|---|
| Filers | 3% | 4% | 5% |
| Late/Delayed Filers | 6% | 7% | 8% |
| Non-Filers | 10% | 10% | 10% |
Breaking It Down
We all must remember that 236K and 236C are both advance income taxes and are adjustable against your income tax. I am sure some genius came up with the idea of late/delayed filer and must be feeling very proud of it, however, it could have been simpler if we treated these late filers as non-filer.
How It Affects Your Transactions
For properties worth up to PKR 50 million, the 3% real estate taxes rate is low and shouldn’t deter you from buying or selling. The only issue here is the confusion of these tax rates at different price brackets, and that has created so much noise in the market already that it’s just going to drive the sentiment down.
3. Federal Excise Duty Tax
Lastly, there’s the new Federal Excise Duty (FED) on newly developed plots and apartments. This will be applied to new 3 projects and
New Proposal: To stabilize the real estate sector and avoid speculation, a 3% FED is proposed on new plots, residential, and commercial property. This real estate taxes will apply to commercial properties and the first sale of residential properties.
Why This Matters
This tax aims to tap into the growing real estate development sector. By taxing new developments, the government wants to ensure developers contribute their fair share of national revenue. This is most likely to be taxed by the developers when they make the first sale of the property.
What It Means for You
The 3% rate might affect how developers price their properties. They might pass on this cost to you, leading to higher prices in the short term. However, the long-term impact will depend on how the market absorbs these changes and the overall demand for new developments.
What’s the Big Picture?
These tax reforms were expected by many in the industry. The main goal is to target non-filers heavily while sparing filers from significant impacts. Here’s a closer look at what this means for you:
Encouraging Tax Compliance
The government wants to get more people and businesses to file their taxes. By imposing higher taxes on non-filers, they aim to reduce tax evasion and increase the tax base. This should lead to more transparency and accountability in the real estate sector.
Minimal Market Disruption
The real estate market is currently slow, so these changes probably won’t cause major disruptions. The heavy taxes on non-filers will push them towards compliance, while filers will see minimal impact.
Fairer Tax System
By moving to a flat rate for capital gains and linking withholding taxes to transaction values, the budget promotes a fairer tax system. These changes make tax liabilities more predictable and equitable, reducing the complexity of tax calculations and compliance.
Advice for You
If you’re a real estate investor or stakeholder, become a tax filer to avoid the heavy taxes on non-filers. By filing taxes, you can benefit from lower tax rates and contribute to a more transparent and accountable real estate market.
Wrapping It Up
In a country like Pakistan where people like to give charity but do not pay taxes, the budget for 2024-2025 brings real bad news. It introduces significant tax reforms that will impact the real estate sector in Pakistan not because the taxation is higher but because we as a nation, hate taxes. In order to make sure that this impacts the market severely and destroys the chances of stability, the confusion created by our fellow Pakistanis in the FBR must be cheered.
The shift to flat rates for capital gains revised withholding tax rates based on transaction values, and the introduction of a Federal Excise Duty on new developments will just create chaos and offer nothing but instability in the market, which is full of uneducated and inexperienced investors and realtors.
For non-filers, the message is clear: become compliant or face heavy taxes. For filers, the reforms actually offer a more predictable and equitable tax environment as long as they are educated about them.
As the real estate market adjusts to these changes, the overall impact should be positive in the long run. Encouraging tax compliance and broadening the tax base will help create a stable and sustainable sector. The real estate sector will continue to play a crucial role in shaping Pakistan’s economy.
Shahnawaz Yaqub Bhatti
Investment Consultant and CEO Imlaak.com
+92 333 1616160
+92 300 2047878
