Different types of property taxes in Pakistan

Taxes are extremely important but also something that people often imagine to be extremely complicated and difficult to understand. This article discusses the various types of property taxes in Pakistan that real estate owners and investors need to be aware of.

How Do Property Taxes in Pakistan Work?

In Pakistan, the property tax is a provincial tax and is levied on the annual rental value of a property. This is based on the Urban Immovable Property Tax Act of the province where the property is located. All provinces have different tax rates. The tax can be a set fee, or it could be calculated as a percentage of the annual rental amount.

Just because the tax could be calculated based on the annual rental amount, it does not mean the property must be rented out. The system has been set in place to assist the government in estimating how much rent would be collected in a year if the property was to be rented out. The tax rate also changes depending on whether the property is self-occupied or rented, in addition to provincial property laws and taxes that apply.

The Types of Property Taxes in Pakistan

Amongst the different types of taxes in Pakistan, there are four major different types of property taxes in Pakistan that you should be aware of, and these include:

• Capital Gains Tax (CGT)
• Capital Value Tax (CVT)
• Stamp Duty
• Withholding Tax or Advance Tax

Although you might not be happy about property taxes, it is mandatory to pay them, as trying to avoid the payment of property taxes can land you in hot water with the Federal Board of Revenue (FBR). If you do not file your taxes on time, the Federal Board of Revenue will send a notice when they discover that there is a disparity. They also have the authority to impose fines or even freeze assets if the owed amount of taxes is not paid.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a federal tax that is meant to be paid by the seller of any property. As the name suggests, whenever anyone makes a profit from selling property, the capital gain, which is the profit, is taxed. The Capital Gains Tax (CGT) needs to be paid only if the property is being sold within three years of being purchased, as per the Finance Act of 2017.

The rate of taxation also varies, with it being 10% in the first year, 7.5% the next year, and 5% if the property is sold in the third year. To ensure fair practice, the gains are calculated in line with the fair market value based on the Federal Board of Revenue’s valuation table. If a person buys property and holds it for more than three years, they are not liable to pay the Capital Gains Tax (CGT).

Capital Value Tax (CVT) & Stamp Duty

While the Capital Gains Tax (CGT) is a tax that is imposed on anyone that is selling any type of property, the Capital Value Tax (CVT) is one of the taxes that must be paid by anyone buying property. Anyone planning to buy property in Pakistan should be aware that there are numerous taxes that must be paid before they can own the property. Capital Value Tax (CVT) is a provincial tax and is calculated according to the capital value of an acquired asset. The rate of taxation is 2% of the recorded value.

This does not exempt property that is transferred as a gift, part of an exchange, or if the rights to the property are relinquished. However, the transfer of property between family members, usually in cases of inheritance, is exempt from CVT. The federal government has made recommendations to reduce CVT and Stamp Duty to a total of 1%. Stamp duty is a type of tax that is paid on legal documents when the property is being purchased. Stamp Duty is charged at 3% of the DC rates of the property.

Withholding Tax (WHT)

Withholding Tax (WHT) is an important type of tax where real estate is concerned. Buyers, as well as sellers, are obligated to pay withholding tax whenever a deal is made. Some important things to note include:

• For homebuyers that file their income tax returns, they have to pay 2%. For those who do not file their income tax returns, the tax rate is 4%.
• People are obligated to pay the withholding tax when buying property, but this only implies if the value of the property exceeds PKR 4 million.
• The seller of the property has to pay only 1% as withholding tax if they file their income tax returns. If they do not file their income tax returns, they have to pay 2%.
• The withholding tax must be paid when the deal is being made and when it is being registered.
• Withholding tax is an ‘advance tax’ and acts as a security deposit on other taxes. It can easily be adjusted into the tax liabilities of anyone purchasing real estate or against the Capital Gains Tax of the seller.

The rates set by the Federal Board of Revenue were meant to be abolished, which meant that sellers would not be required to pay Advance Tax, and the rates would change for buyers as well. The Directorate of Immovable Property (DGIP) is an institute set up by the government to ensure that the declared values of properties are reasonable. By using geo mapping technology for plots, apartments, and housing schemes will help them to better determine the value of properties and ensure that they are not being undervalued or overvalued.

Wrapping up

It is extremely important to be highly vigilant and fully informed when purchasing land and paying property taxes in Pakistan. The buying and selling of property usually means that large sums of money are involved, and even a small mistake can result in immeasurable loss. Taxation in Pakistan can be difficult to understand, which is why it is better to hire the services of a professional if you are not fully aware of the types of taxes on property purchase in Pakistan.

Digitization has helped a lot, and it is now possible to easily check the owed taxes through the property tax calculator on government websites. It is always advisable to invest only in well-known and renowned projects like those offered by Chapal Builders to keep your money safe and get hold of a property that you are going to love and cherish for years to come.