Minimum asset tax on resident citizens proposed

ISLAMABAD: The Resource and Revenue Mobilisation Commission (RRMC) has proposed slapping of Minimum Asset Tax (MAT) on the value of moveable and immoveable assets owned by resident individuals in Pakistan having exceeding value of Rs100 million.

According to the interim report of the RRMC, it is proposed slapping of MAT through extension of Capital Value Tax (CVT) on local assets of resident individuals.

The proposed Minimum Asset Tax (MAT) shall be a minimum tax at an agreed tax rate on the value of movable and immovable assets including agricultural property, business property, etc. located in Pakistan held and/or owned by a resident individual where the asset value exceeds Rs100 million for a given tax year.

The CVT/MAT assumes that an annual return of 5% is fetched by assets invested by the taxpayer on the assumption of a 20% tax rate on income.

The said rate of 5% can reasonably be assumed to be earned on assets held by an individual.

This scheme would mitigate inequality of tax rates between the rich and poor encouraging equity for income tax purposes. Moreover, the MAT/CVT will ensure that a minimum amount of tax on agricultural property is collected by the FBR.

This shall be done by extending the ambit of the current CVT provision (Section 8 of Finance Act 2022) to assets held and/or owned in Pakistan by resident individuals.

The value of the asset shall be the value at the end of the tax year. As such, the MAT on foreign assets shall be adjustable from tax liability on foreign income. Similarly, the MAT on domestic assets shall be adjustable from the tax liability on domestic income.

The MAT would not apply on individuals in the two tax years when the individual was not a resident individual in any of the four tax years preceding the first tax year in which he became a resident due to employment in Pakistan. It is proposed Section 7E must be done away with, as it is already subject to excessive litigation.

Certain incomes of individual taxpayers are chargeable to tax at reduced rates or subject to exemptions, resulting in a reduced effective rate of tax on overall basis on their income. A Minimum Asset Tax (MAT) is proposed on individual taxpayers through the mechanism of Capital Value Tax (CVT). The MAT denotes a percentage of fair market value of assets which is the minimum amount of Income Tax a person must pay. Moreover, the MAT is different from Wealth Tax, as it is paid as a percentage of assets of the taxpayer in addition to taxpayer’s Income Tax liability. Whereas, the MAT is used to calculate a minimum amount of direct tax as a percentage of its foreign assets which the taxpayer is required to pay.

As of now, the provisions of CVT are applicable on foreign assets of a resident individual at the rate of 1% on the basis of total cost of the assets, translated into Pak rupees at the exchange rates prevailing on the last day of the tax year for which return of income is being filed.

The salient feature of the proposed MAT included the CVT would be in the nature of MAT which is proposed to be calculated at an agreed tax rate of the fair market value of both movable and immovable assets located in Pakistan.

The resulting CVT/MAT shall be the minimum amount of tax on assets the taxpayer is required to pay for both local and foreign assets. This CVT/MAT would be adjustable against the Income Tax liability of such taxpayer, and the liability would be ultimately discharged at the higher of the two (CVT/MAT or income tax liability). However, the tax calculated as a percentage of foreign assets would be adjustable against the tax liability relating to foreign income only. Similarly, tax calculated on local assets would be adjustable against local income only. Moreover, the taxes paid on agricultural income to provincial authorities would be liable to be deducted from MAT/CVT calculated on agricultural property, subject to submission of proof of payment of tax.

Local immovable assets will be valued using the property valuation rates notified by the FBR. It is relevant to recommend here FBR should re-visit these notified rates and should also include the rates relating to agricultural property in its valuation table.

All other assets will be valued on the basis of their respective Fair Market Values. Shares of listed companies will be valued at their market rates at the end of the day, existing on the last day of the tax year. Shares of unlisted companies will be valued at their break-up value which, for the purposes of CVT, would be computed by using Fair Market Values of assets present in such company’s financial statements. For example, the immovable property being owned by the company would be valued at FBR’s notified values, shares of listed companies in the manner specified in (c) above etc. No assets would be exempted for the purposes of calculation of MAT/CVT.

A certificate by auditors of unlisted companies would need to be submitted as regarding break-up value calculated for the purposes of CVT/MAT on the basis of Fair Market Value of assets at the close of the tax year. Section 7E would need to be abolished as CVT/MAT would cover such assets in its ambit. Moreover, Section 7E may not be upheld by the courts of law and has already been held ultra vires and read down by the Lahore High Court. To calculate MAT/CVT, the assets of the taxpayer along with those held and/or owned by the person’s dependents will also be accounted for.

The scheme would not apply to individuals in the two tax years when the individual was not a resident individual in any of the four tax years preceding the first tax year in which the individual became a resident due to employment in Pakistan.