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Govt strikes money laundering at source, property taxes under scrutiny

June 14, 2019 (MLN): Having completed its first 10 months in office, Pakistan’s incumbent government has realized the severe need to pull up their socks and combat corruption and money laundering in order to not only retrieve the thieved money, but also to restore the country’s wildly deteriorating economic status and to avoid slipping from FATF's greylist to its blacklist.

Therefore, in the federal budget announcement for fiscal year 2020, the Board decided to freeze illegal and corrupt operations within the most eminent refuge of money-laundering, i.e. the real estate sector.

Real estate is one of the most common ways to park black-money by means of understating a property’s real market value via DC rates quoted much lower than the actual market rates.

To counter this, the government has taken a series of corrective measures.

First of all, in order to ensure that all properties are correctly valued officially, the Federal Board of Revenue (FBR) has circulated valuation tables for immovable properties in 21 major cities.

Moreover, the buyers of such properties are required to pay a tax of 3% on the difference between FBR’s valuation and DC valuation, thereby declaring the hidden assets.

However, since the government believes that the rates put forth by FBR are also relatively underestimated compared to the actual values, it has decided to increase the Board’s rate to nearly 85% of the actual market value.

As a result, this would put a heavier burden on the genuine buyers and sellers of these properties. Thereby as a corrective measure, the withholding tax on purchase of immovable properties has been proposed to be lightened from 2% to 1%.

Another important and highly needed proposal is that anyone looking to purchase an immovable property of fair market value above Rs.5 million, or a movable property with a fair market value above Rs.1 million must process all transactions via banking instruments other than bearer cheque.

This would ensure clear and open transactions from one bank account to another.

Failure to comply with this requirement would result in a penalty of 5% on FBR’s value of immovable property, in addition to the demolishment of depreciation allowance. Moreover, the purchase price for the purpose of capital gain shall also be treated as nil.

Furthermore, the government proposed to tax capital gains at normal tax rates. Under this regime, if a property is sold within one year of purchase, 100% of the capital gains earned on the sale will be taxed. At present, the unconstructed properties sold after holding them for over three years are not to be taxed. However, under the new proposal, this time period has been extended to 10 years.

Similarly, for constructed properties, income from capital gains shall not be taxed if the properties is sold after five years of holding.

In case the property is sold after 1 year of purchase, the tax shall be charged on 75% of the income.

However, it would appear that people who have understated the value of property purchased within the last year can reduce the Capital gains tax if they avail the tax amnesty scheme offered by the government as the Asset Declaration scheme part 1 section 5 allows the enhancement of values of properties purchased under Tax Ordinance 2001 or the Voluntary Declaration of Domestic Assets Act 2018.

Apart from this, the benchmark value of Rs.4 million for implication of withholding tax on properties is also being abolished which means the tax in implied irrespective of the value.

Copyright Mettis Link News

Posted on: 2019-06-14T15:29:00+05:00


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