Tax on deemed income from property may end up in court

ISLAMABAD: Immovable property worth more than Rs25 million will be taxed at one percent of the fair market value determined by the FBR or 20 percent of deemed rental income. However, personal residence and possession of one plot will be exempted from this tax.

Under the Finance Bill 2022, the rate of the proposed tax on deemed rental income will be standing at 20 percent. This proposed tax on deemed income from unused property having a value of above Rs25 million will not become applicable on self-owned agricultural land.

The proposed tax on deemed income from the unused property above Rs25 million would not be applicable to the self-owned agriculture land whereby agriculture activity is carried out.

The bill has proposed to introduce a new section 7E, whereby, the concept of deemed rental income has been introduced. The rental income of the eligible property shall be deemed to be 5% of its fair market value, irrespective of the fact whether such property has been rented out or not, and a tax at the rate of 20% on such deemed rental income will be charged. This means the effective tax rate on fair market value of the property will be one percent.

However, where the actual rental income exceeds the FBR’s determined rate will be applied. The Section 7E shall not apply to the following: a) self-owned business premises from which business is carried out; b) self-owned agriculture land where agriculture activity is carried out by person but does not include farmhouse and land annexed thereto; c) where the fair market value of the property or properties, in aggregate, excluding properties mentioned in (a) and (b) above does not exceed Rs 25 million; d) a Provincial Government, a Local Government, a local authority or a development authority; e) land development and construction projects of builders and developers registered with Directorate General of Designated Non Financial Businesses and Professions of Board; f) a property which is subject to tax under Section 15 (income from property) of the Ordinance and the tax chargeable is more than tax chargeable under this section.

Former FBR chairman Shabbar Zaidi in his commentary on the Finance Bill 2022 stated that for the tax year 2022 wealth tax in an indirect method on immovable property situated in Pakistan had been re-introduced. Under the proposed system, all immovable property valued above Rs25 million (other than a house for own residence) will be subject to deemed tax.

The income of such tax will be 5 percent of the fair market value of such property. The tax rate will be 20 percent of such income. This means under the new section, a wealth tax at the rate of 1 percent has been levied under the provision.

Under entry 50 of the Federal Legislative List of the Constitution, the federal government is not entitled to tax the capital value of the immovable property. Now, this controversy might land in a court of law for seeking interpretation.