RRMC seeks tax registration
The report points out that there are taxpayers who hold properties but do not declare them in wealth statements until the required holding period has passed, at which point they claim the capital gain as exempt from taxation. Photo: file
The government’s Revenue Commission has recommended compulsory tax registration of buyers and sellers of properties and also sought to link capital gains tax exemption with disclosure of the assets at the time of its purchase to capture the most undocumented sector.
The Reform and Revenue Mobilisation Commission (RRMC) has also recommended that all the benami properties be taxed in the year they are discovered, removing the current time limit on such actions to combat tac evasion.
Led by Ashfaq Tola, the commission has put forth a proposal to overhaul the real estate taxation system ahead of the budget. This move is expected to encounter little resistance from the Federal Board of Revenue (FBR), particularly regarding the exemption of capital gains tax on immovable property.
The real estate sector hosts a substantial parallel economy due to its lack of documentation.
The Tola Commission report highlighted the lack of data on residential units exceeding 2000 square feet or immovable properties with land areas of 500 square yards or more. It suggested that the FBR lacks the willingness to enforce the law and expand the tax base. According to the report, non-filers should be issued compulsory National Tax Numbers (NTNs) to carry out specific transactions, such as vehicle and property sales, foreign travels, and club memberships.
Even if the government legally endorses the Commission’s recommendation, it is unlikely that the FBR will fully capitalise on it. Pakistan currently has 7.6 million NTN holders, but only 3.6 million of them file their tax returns.
The Commission has highlighted a significant under-reporting of income and property among individuals. Based on data from the FBR for the Tax Year 2022, it was found that 34.1% of individuals, 46.3% of associations of persons, and 62.8% of companies filed their income tax returns but did not pay any taxes according to their returns.
To address the issue of tax evasion in the real estate sector, the Commission recommends that the exemption from capital gains tax (CGT) on the sale of immovable property should only apply to those who have declared the property in their wealth statements during the year of acquisition and in subsequent years until its disposal. Furthermore, it suggests that the CGT exemption should only be granted once every three years.
Currently, the Income Tax Ordinance exempts capital gains tax on the sale of a flat held for a minimum of three years, constructed property held for a minimum of five years, and open plots held for a minimum of six years.
The report points out that there are taxpayers who hold properties but do not declare them in their wealth statements until the required holding period has passed, at which point they claim the capital gain as exempt from taxation.
The influential individuals and segments in Pakistan support the real estate sector, which contributes to high levels of tax evasion in the industry. Finance Minister Ishaq Dar is scheduled to announce the budget on June 9, and adopting the recommendations of the Tola Commission may aid in achieving the FBR’s tax collection target of Rs9.2 trillion for the upcoming fiscal year.
Apart from imposing CGT on the sale of immovable properties, the government also collects withholding taxes on property transactions. However, these taxes are based on unrealistically low property values, leading to significant tax evasion.
To combat tax evasion by individuals holding benami properties, the Commission recommends an urgent amendment to Section 111 of the Income Tax Ordinance. It proposes that all undeclared benami assets should be taxed in the year they are discovered, and the statute of limitations should apply from the year of discovery.
The current law imposes taxes on foreign assets in the year they are discovered due to the challenges of identifying and tracking such assets. For local assets, there is a separate law prohibiting benami holdings. However, there is a legal issue regarding its applicability to assets created before the law’s enactment, according to the Commission.
The RRMC suggests that amending Section 111 would expand the tax base and increase revenue from undisclosed assets. This will also deter asset concealment until the statute of limitations expires, at which point they can be easily declared in the wealth statement.
Published in The Express Tribune, May 18th, 2023.
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