Tax on Deemed Income in Pakistan
Tax on Deemed Income: All You Need to Know
The concept of deemed income from property in Pakistan is often confusing to many people. In this blog post, we will discuss what deemed income from property in Pakistan is, how it is calculated, and how it is taxed. We will also list the various exemptions available to taxpayers in relation to this type of income. By the end of this post, you should have a better understanding of this tax and be able to make more informed decisions about your property investments in Pakistan.
The government added section 7E in the Income Tax Ordinance, 2001 through Finance Act 2022. The implementation of this section is retrospective with effect from 1st July 2021. This section envisages that the resident Pakistani who owns real estate property accrue deemed income from such properties. And this kind of income (deemed income) shall be taxed @ 20% starting from the tax year 2022.
Imposition of tax on deemed income was challenged by different trade bodies in High Court of Sindh and that of Punjab. Initially, the high court of Sindh issued stay order on its imposition till the final decision on the case. Lately, the Sindh high Court announced its verdict in favour of the government whereas the case is still pending the the high Court of Punjab.
How to Figure Out Deemed Income?
The question is how this deemed income would be figured out? For this purpose, irrespective of the purchase price of capital asset / property, fair market value of such property is taken as the basis for computing the “deemed income”. To figure out deemed income, five percent (5% ) of the property’s fair market value would be considered as the basis. In order to get the fair market value, the base is the valuation table issued by FBR that contains value of immovable property in different areas of almost all major cities. You can find FBR valuation on its website.
Tax Form for Computing Tax on Deemed Income
In October2022, the FBR uploaded the deemed tax form on iris so that the tax could be calculated and paid. Now, the government has made it mandatory for filers to fill out the form. Even if you already filed your tax return, you still have to file the deemed tax form by December 31, 2022.
Types of property to be Listed in Form for Deemed Income
In the new deemed form, taxpayers must list all types of immovable property, such as agricultural, industrial, residential, and commercial, as well as the total value of deemed taxable assets and the deemed income under Section 7E of the Income Tax Ordinance.
Exclusions of Property for Computing Deemed Income
A resident person is considered to have earned taxable income equal to 5% of the fair market value of capital assets located in Pakistan and held on the last day of the tax year. However, following property are excluded from the purview of this rule:-
- One capital asset that the resident person owns
- Self-owned business premises from which the business is run by people who were on the active taxpayers’ list at any time during the tax year
- Any property from which income is charged to tax and tax has been paid
- A capital asset in the first tax year of acquisition on which tax has been paid under
section 236K of ITO, 2001. Capital asset allotted to:
A Shaheed or dependents of a Shaheed of Pakistan Armed Forces
A person or dependents of the person who dies while in the service belonging to armed forces or Federal or provincial government
A war wounded person while in the service of Pakistan armed forces or Federal or provincial government
An ex-serviceman and serving personal of armed forces or ex-employee or serving personnel of Federal and provincial governments, being original allottee of the capital asset when certified by the allotment authority
Text of Section 7E-Tax on deemed Income
(1) For tax year 2022 and onwards, a tax shall be imposed at the rates specified in Division VIIIC of Part-I of the First Schedule on the income specified in this section.
(2) A resident person shall be treated to have derived, as income chargeable to tax under this section, an amount equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of tax year excluding the following, namely:–
(a) one capital asset owned by the resident person;
(b) self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers’ list at any time during the year;
(c) self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse and land annexed thereto;
(d) capital asset allotted to –
(i) a Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;(ii) a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial
government;
(iii) a war wounded person while in service of Pakistan armed forces or Federal or provincial government; and
(iv) an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and
provincial governments, being original allottees of the capital asset duly certified by the allotment authority;(e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;
(f) capital asset in the first tax year of acquisition where tax under section 236K has been paid;
(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million;
(h) capital assets owned by a provincial government or a local government; or(i) capital assets owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non Financial Businesses and Professions.
(3) The Federal Government may include or exclude any person or property for the purpose of this section.(4) In this section–
(a) “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include–
(i) any stock-in-trade, consumable stores or raw materials held for the purpose of business;
(ii) any shares, stocks or securities;
(iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or(iv) any movable asset not mentioned in clauses (i), (ii) or (iii);
(b) “farmhouse” means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an
annex:
Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse.
We hope this article helped you learn more about tax on deemed income in Pakistan, and how to compute it excluding the exempted capital assets. You may also want to read Income tax return.
