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Impact of Latest Property Tax 2016 on Real Estate Pakistan

Impact of Latest Property Tax 2016 on Real Estate

In the budget 2016 Federal government has increased taxes on the real estate sector. A lot of rumors are spreading in the market about how the real estate market will react to the newly imposed Property Tax 2016. I believe that Real estate is much more dependent on other factors for its growth than the taxes .However it is important to analyze the short term effects of these taxes to find the best time to buy a much more profitable property investment.

The details of the newly imposed taxes by the Government are as under:

1. CGT (Capital Gain Tax)

Payable to the federal government when you file your yearly tax returns by the SELLER as per Property Tax 2016. This tax makes you liable to pay the 10% as tax to the Federal government on the difference of gain between your buying price and selling price at commercial rates. These commercial rates will be evaluated by the licensed state bank evaluators.

Let us assume that you purchased a plot in 2015 at 2 Crores and sold it in 2017 at 3 crores. The price difference is 1 crore, so you will have to pay 10% of total gain in the price etc 10 Lacs as the CGT. The tax is only valid for property sold within first 5 years of its purchase and exempted after 5 years from any CGT. It is also noteworthy that if the commercial prices have not increased than there is no CGT on selling your property.

2. Advance Tax on Sale Section 236 C

Government has increased advance tax on sale as per Latest Property Tax 2016 on Real Estate for a filer from 0.5% to 1 % and for a non-filer from 1 % to 2%, payable as per DC rate and not as per commercial rates as previously rumored.

3. Advance Tax on Purchase Section 236 K

Government has increased advance tax on purchase as per Latest Property Tax 2016 on Real Estate for a filer from 1% to 2 % and for a non-filer from 2 % to 4%, payable as per DC rate and not as per commercial rates as previously rumored.

 

Aim of the Government

The aim of the government behind increase in Latest Property Tax 2016 on Real Estate are :

  1. Increase its tax net and revenues on investments made in the real estate sector.
  2. Increase white money circulation in the real estate sector.
  3. Redirect the money from real estate into industrial sector.

Effects of Latest Property Tax 2016 on Real Estate

There are a lot of rumors that the latest property taxes 2016 levied on real estate will affect the real estate market negatively. While this seems to be the most simple outcome the truth may be a far cry from what it seems. For us in the real estate market it is a signal to buy more real estate on correction . Real estate is much more dependent on other factors for its growth than the taxes . Growing Economy , Population and CPEC will over shadow the impact of these taxes in the real estate sector.

Who will be effected?

The effects of advance tax on the seller or purchaser are insignificant and will not have any major implications. The CGT, however is scaring most people and rightly so. As per the Federal government CGT will be levied on properties being sold within 5 years of purchase. No CGT will be levied on properties which are being sold after 5 years of purchase. Governments intends to direct the investors to invest their money in other sectors such as industry etc. Therefore creating more jobs and economic boom in the country.

The short term investor is going to suffer and will have to pay 10% of his profits if he sells the property before 5 years. Good thing is he still gets to keep 90% of the profit. CGT will however have minimal effect on medium term and long term traders as the profit margins will be enough to cover up the 10% CGT.

Let us explain this by 3 examples.

Short Term Trader

You buy a plot at 10 Million and you sell it at 11 Million after 3 Months. You will be liable to pay One lacs as CGT. Similarly if you make a bigger trade of 100 Million and sell it at 110 Million, you have to pay 1 million as CGT. You still pocket 9 Lacs and 9 Million respectively making short term trades.

Medium Term Trader

You buy a plot at 10 Million and you sell it at 14 Million after 2 years. You will be liable to pay Four lacs as CGT. Similarly if you make a bigger trade of 100 Million and sell it at 130 Million, you have to pay 3 million as CGT. You still pocket 3.8 Million and 20.7 Million.

Long Term Trader

You buy a plot at 10 Million and you sell it at 20 Million after 5 years. You will be liable to pay zero as CGT. Similarly if you make a bigger trade of 100 Million and sell it at 150 Million, you have to pay zero as CGT. You pocket all your profits.

Conclusion

So it is basically nothing but taxes on the profits you make. As a nation we always run away from taxes and do not consider our duty to pay taxes. Taxes run our country and help build a stronger economy a stronger economy means more real estate demand and spread of money more evenly among the masses.

I do not believe that real estate will be effected by these taxes. Market is bound to see a correction not because of CGT but because it has risen exponentially in the last year. The imposition of new taxes will just act as a trigger to that correction. When the market will recover from this correction in a couple of months, we will see the market rising steadily with natural growth.

Short term traders will certainly have a bit more to worry and as Government perceive they may take their money out of real estate and invest it in other sectors. The big question is where? If not real estate. Real estate has remained the oldest of investments for centuries and I do not believe that some taxes can change that. I also doubt that short term investors will shift their money to other sectors exponentially. The real estate sector in Pakistan remains the safest and secure investment one can think of. So unless Government finds a way to make our industry offer high returns to the investors , these new taxes are just a way to collect more money from a sector which has never been taxed much in comparison to the profits it has to offer.

Read our Market Analysis for July 2016 here

 

 

Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1717170 ( Whatsapp)

Skype : Shahnawaz.yaqub

 

 

 

 

 

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Suhaib Hassan
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Suhaib Hassan

Wow worth reading. Can you please suggest me a place to buy in bahria town karachi. I’ll be very thankfull to you. my estimated budget is 8 million. I have visited zemab.com.pk they said 8 million will not be not be enough for investment in bahria town. Is that true ?

Mafia Dushman
Guest
Mafia Dushman

Well, this article seems really biased and intends to protect vested interest of property mafia.

Tepu
Guest

Nice article!

How about the Installment plan? Lets take an example…The plot file/form is issued to a person in 2013 and payment is made over a course of 2 years and possession is given in 2015.
In this scenario, the CGT period will start from 2013 or 2015?

MR
Guest
MR

Oversees Pakistani’s are considers Filters or Non-Filers?

Hammad Gillani
Guest
Hammad Gillani

though an appreciable attempt but over simplification of the tax issue, the basic issue is the declaration of wealth and source of money as most of the people investing in real estate are taking the benefit of the closed eye of taxation network towards this sector from income & wealth tax point of view. Moreover taxation of same property on two different valuations is also seemed legally and logically a far cry and even constitutionally not sustainable at all. So if at all there is a correction ahead it is going to last for a while and will become graver… Read more »

Zahid Amin
Guest
Zahid Amin

Thanks for the discussion.

Ahmed
Guest
Ahmed

Your analysis on the impact of CGT does not take into factor a common practice of declaring property purchases on DC rate. The gain tax will be paid on the difference of purchase price (DC rate) and sales person price (market price). You analysis in long and short term impact does not take into factor the govt policy of retrospective taxation on purchases during last 5 years for a tax filer and 10 years for non filer……in my opinion, if the policy is implemented per se, market prices will gradually come to in great proportions, depending on the speed of… Read more »

Saleem khari
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Saleem khari

Nice

Fida khan
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Fida khan

AoA. I do appreciate your analysis. You have not touched one point which requires clarification i.e. A plot purchased on 5 years installment programme with a down payment in 2010 and final installment in 2015. Which date would be deemed as purchased date for the purpose of tax?
Thanks.

Sultan Habib
Guest
Sultan Habib

I am a tax filer since long. My tax matters also handled by a CA. In tax year 2015 I purchased an Allocation file of a 4 M Comm plot for a price much higher than the DC value. My Accountant insisted to show the purchase value at DC rate. What should I do, should I revise the WTR?

Mùhąmmąd
Member

Dear Sir,

Great analysis and very informative blog. However i would like to ask few questions . How sure are you that Advance Tax is on DC value and not on Current Market Value? Secondly how will it effect people who have bought plots on open File transfer and they sell plots now.

I have heard that Ishaq Dar is meeting Dealers on Monday, when can we except clarity on everything?

Imran shaikh
Guest
Imran shaikh

Dear capt sb…aoa…i m an short term investor…i m not agreed with u…coz…slump of property is nt only coz of 1% to 2%..and coz of c g t…its reason according to me is ..commericial market value..& state bank evaluaters..i think 80% investors hav not a huge white money..they buy a plot of 3 crore & show in docoments as 60 lac…so i think 10 yrs before situation..comes back

ahmad waqqas
Guest
ahmad waqqas

please explain the role of licienced state bank evaluator