Pakistan Real Estate Tax 2024-25 – Will Prices Rise or Fall?

Pakistan Real Estate Tax 2024-25 – Will Prices Rise or Fall?

Following the introduction of new tax policies for the fiscal years 2024-25, Pakistan’s real estate landscape is currently undergoing significant changes that are expected to impact both the buyers and sellers of the real estate market. The impact of these policy changes, particularly on Capital Gains Tax (CGT), Federal Excise Duty (FED), and Advance Income Tax, are expected to majorly affect property prices and trends in investments. 

Impact on Non-Filers and Late Filers
One of the most significant changes that the Budget 2024-25 brought is its rigid approach towards non-filers and late filers. Non-filers, who are individuals who do not file their tax returns, have previously faced higher tax rates compared to filers. The budget continues that trend but now targets late filers as well. Late-filers are individuals who delay their tax filing beyond the due date but before the purchase of property. With the introduction of the new property tax regulations, late filers will now face higher tax rates than regular filers, but lower than non-filers, thereby encouraging timely tax filing. 

Property Value Up To Rs 50 Million:
●    Filers: 3%
●    Late Filer: 6%
●    Non-Filers: 12%

Property Value From Rs 50 – 100 Million:
●    Filers: 3.5%
●    Late Filers: 7%
●    Non-Filers: 16% 

Property Value Above Rs 100 Million:
●    Filers: 4%
●    Late Filers: 8%
●    Non-Filers: 20%

Judging from the new regulations implemented by the 2024-25 budget, it can be deduced that these changes aim to consolidate the tax regime and motivate taxpayers to timely file their taxes. Here is a detailed look at the proposed changes to help you better understand their impacts on your real estate transactions. 

1.    Capital Gains Tax on Real Estate
Previously, the CGT on securities in Pakistan was structured according to the holding period – longer holding periods, usually after 6 years, meant lower tax rates, encouraging long-term investments in real estate. 
 

Following the 2024-25 budget, a flat tax rate of 15% for filers and up to 45% for non-filers will be applicable regardless of the holding period. This rate will apply to properties acquired on or after July 1, 2024, whereas properties acquires on or before June 30th wil follow the previous tax structure based on the holding period. 
This change to standardized taxation will likely have several impacts:

●    Increased Revenue: The government expects to raise an additional 60 billion in revenue due to this uniform tax rate.
●    Investment Decisions: Investors may now reconsider their strategies, as holding property for longer periods no longer provides tax advantages.
●    Market Dynamics: The change could discourage investment, as the overall taxation is increasing for the market.

2.    Progressive Withholding Tax on Transfer of Immovable Property 

Real Estate sellers are also subject to advance tax rates when selling immovable properties, a policy that aims to ensure immediate tax collection. The advance tax rates are based on the seller’s tax filing status and the value of the property sold. 
    
Property Value Up To Rs 50 Million:
●    Filers: 3%
●    Late Filers: 6%
●    Non-Filers: 10%
 
Property Value From Rs 50 – 100 Million:
●    Filers: 4%
●    Late Filers: 7%
●    Non-Filers: 10% 

Property Value Above Rs 100 Million:
●    Filers: 5%
●    Late Filers: 8%
●    Non-Filers: 10%

Real estate buyers must withhold taxes when purchasing property, which are subsequently paid to the government on behalf of the seller. This process ensures timely tax compliance and minimizes opportunities for tax evasion. The withholding tax rates correspond with advance taxes, highlighting the importance of the seller's tax filing status.

3.    FED on Immovable Property
The new budget has also proposed a Federal Excise Duty (FED) of 5% on new plots, as well as residential and commercial properties, in an attempt to stabilize the real estate sector and control speculation.
●    Commercial Properties and First Sale of Residential Properties: A 5% FED will be applied. 

4.    Implementation of 7-E Taxes
 

In 2022, the 7-E Tax was introduced in an attempt to impose an additional tax on immovable properties to increase government revenue. The response to this tax was not overly positive, with various stakeholders in the real estate sector resisting its imposition, leading to numerous legal challenges that argue against the fairness and constitutionality of the tax. 
Despite these legal hurdles, the tax continues to be imposed, leading to a lot of uncertainty and potential hurdles for property buyers. 
The debate around the 7-E Tax centers around whether it should be based on cost value or the current market fair value. Nevertheless, current property buyers may still be subjected to pay 1% of the property’s value as 7-E Tax at the time of purchase. 
Until the Supreme Court of Pakistan has delivered a final verdict, the 7-E Tax remains in effect and continues to be a significant factor with regards to real estate transactions. Buyers, therefore, should be made aware of this tax when making investment decision as it is an additional and compulsory cost. 
Impacts on the Property Market 
 

The primary goal of the proposed changes in real estate taxation for 2024-25 is to create a more organized and yielding tax environment and trends. These changes include significant adjustments to capital gain tax, progressive withholding tax, and the introduction of FED on immovable property, and property buyers, sellers, and investors must be well-informed about these updates in order to make well-informed decisions.
The changes that these tax policies may bring are expected to receive a mixed response. While the flat CGT rate and increased advance income tax for non-filers may initially discourage market and investment activity in the short run, the government’s intention to encourage filer compliance will help reduce tax evasion and therefore increase transparency and stability in the long run. 

Key Takeaways:
●    The new tax policies are aimed at increasing revenue and encouraging tax compliance.
●    The impact on property prices will depend on the market’s response to the changes.
●    Non-filers will face a significant financial burden due to the higher CGT and advanced income tax rates.
●    The government’s efforts to streamline the real estate sector could lead to increased investment and market growth in the long term. 

It is important to consider the fact that these measures are a testament to the government’s attempts and commitment to fostering a more transparent, standardized, and compliant real estate market. Property buyers and sellers, therefore, should stay informed about how these regulations impact their investments and transactions, and understand how their investment behavior can contribute to a more robust and lucrative real estate market.