Finance Minister Miftah Ismail unveiled the budget for the next fiscal year 2022-23 in the National Assembly, focusing on fiscal consolidation to contain the budget deficit.

The budget has been formulated while considering the challenges the economy faces on domestic and international fronts.

The Downfall of the Real Estate Sector 

The most critical moves from the IMF program in the budget related to the real estate sector. The government has proposed several changes in taxation policy for the real estate sector’s budget for the fiscal year 2022-23. These changes will have a significant impact on the industry, both in the short and long term. 

Previously, when the same PML(N) government-imposed taxes in its last rein, we saw a significant decline in the real estate market. The transactions were almost zero; investors were not taking much interest because they did not feel secure with the new tax policies.

Capital Gain Tax

The government imposing a 15 % Capital Gain tax and doubling the advance tax on real estate in this budget will destroy the real estate sector in Pakistan. 

According to the new policy, If you hold the property for one year, the tax rate will be 15%. And every year will reduce this tax rate by 2.5%, which means you need to pay 12.5% ​​tax after two years, 10% tax after three years, 7.5% tax after four years, 5% tax after five years, and 2.5% tax has to be paid after six years. And 0% tax if you own a property for more than six years. This budget results in an artificial price hike in the real estate sector, taking housing facilities out of the reach of the middle class.

If you don’t want to pay capital gains tax, you must hold the property for more than six years. So, it is beneficial for those who are looking for a long-term investment.

Following is the Capital Gain Tax period for different property types:

  • Plots: CGT will apply if you sell a plot before six years and 0 tax in the 7th year.
  • House: CGT will apply if you sell a house before four years, and 0 tax in the 5th year.
  • Apartment: CGT will apply for the first year, and 0 tax from 2nd year.

This measure also encourages investment in apartments and houses (construction) and discourages investment in plots.

These new policies have also caused some concern among investors in the country’s real estate market. While it is unclear what the exact impact of these taxes will be, this could lead to a decline in transaction activity and investment in the sector. However, it is also worth noting that the real estate market in Pakistan has faced some challenges in recent years due to transparency and accountability issues. Therefore, it remains to be seen how these new taxes will impact the market in the long term.

Role Of Real Estate During Covid-19

Real estate is the only sector that increases our country’s economy during Covide-19. When companies are laying off their employees, real estate is the only sector that keep on hiring people just to save the country from poverty and unemployment. 

But now, the federal government has imposed 440 billion new taxes on the real estate sector in this budget for 2022-2023. FBR Chairman Asim Ahmad said that the Federal Board of Revenue had submitted a proposal of 440 billion in new taxes to the federal government, which was approved and presented in the budget.

Following is the division of new real estate taxes:

  • Rupees 90 Billion in terms of Sales Tax and Federal Excise Duty
  • Rupees 316 Billion in terms of income tax
  • Rupees 34 Billion in terms of Customs Duty

Not only this, but according to the press that FBR has decided to provide relief of 85 Billion in taxes to the real estate sector in the next fiscal year, and the next budget will impose a total of 316 Billion in taxes. The detail of the implemented tax ratio is also made public by the Federal Board of Revenue. 

Advance Income Tax

Advanced tax on the sale or purchase of immovable property has been increased to 2% for tax filers, whereas non-filers will pay 5% tax at the time of buying a property. Earlier the Advance tax was 1% on filers and 2% on non-filers.

This measure can adversely impact sale purchase activity as the cost of a property will significantly increase, so investment incentives will diminish with such high taxes.

It is essential to mention here that many Overseas Pakistanis buy properties in Pakistan for investment or future residence, so a large portion of remittances can be affected if they are discouraged from buying properties by imposing huge taxes.

A tax filer who buys a property for investment will end up paying the following three taxes:

  • Advance Income Tax 2% at the time of purchase
  • up to 15% CGT at the time of sale before six years
  • Deem tax 1% of FBR value per annum due to assumed income on the property

Such excessive taxation is likely to discourage real estate investments. Additionally, construction cost has increased massively in the past two years, so builders may also stop construction activities due to low demand and a high risk of loss due to rising inflation.

Progency regularly brings you the latest news like this one to keep you updated on the real estate sector! Check out our blog for more informative content. Contact us for the sale and purchase of the property.