Whether you are buying a property or selling one, you will be required to pay various taxes. The problem that arises is, it’s not clear who is supposed to pay which kind of property tax. This leads to many individuals making a lot of mistakes or becoming victims of fraud or illegal activities.
So, in order to help you out, we have explained the different types of taxes charged on property and who needs to pay them.
What is Property Tax?
Before getting into the details of the kinds of property related taxes or how to determine their amount, let us tell you what it is.
The tax imposed on one’s property is called the property tax; it is based on the annual rental value of a property. Every province has their own Urban Immovable Property Tax Act, and as per the acts each province has their own tax rates. It can be a flat rate or percent of the annual rental value of the property. When we say the rental value of the property, we don’t necessarily mean the actual rental value of the property, but an estimated amount, on which the property can be rented out.
It is up to the province to decide the tax rate, which might also depend on whether the property is rented-out or occupied by the owners.
For example, the Excise, Taxation and Narcotics Control Department, Punjab charges a 5% tax on the annual rental value, while the Sindh Excise and Taxation Department charges 25%.
Types of Property Taxes in Pakistan
Taxes on property in Pakistan are majorly divided into two categories, tax on the sale of property and tax on the purchase of property. Following are the 4 types of property related taxes in the country:
- Capital Gains Tax (CGT)
- Capital Value Tax (CVT)
- Stamp Duty
- Withholding Tax/ Advance Tax
Let’s briefly discuss the above mentioned taxes, who is required to pay them and when.
Tax on the Sale of Property
If you are selling a property in Pakistan, you will be required to pay the capital gains tax. Let’s tell you about this specific type of tax in more detail.
Capital Gains Tax (CGT)
This kind of tax is paid on the profit gained by the seller, thus the reason it is called the Capital Gains Tax. As per the Finance Act of 2017, Capital Gains Tax is a federal tax, and is charged on a property that was sold in the first three years of purchase.
If you have bought any property and wish to sell it within a year, the tax rate for you will be 10%. If you sell a property in the second year or the third year of the purchase, you will be charged 7.5% and 5%. The tax amount will be calculated based on the market value which depends on FBR’s valuation table.
However, if you put your property for resale after the first three years of your purchase, you will not be charged CGT on your profit.
Tax on Purchase of Property
While you are looking at properties to purchase in Pakistan, you should also take a look at some other factors. These include considering the perks of investment in Karachi or Lahore, top residential areas in a city, or the amount that the buyer will be required to pay in taxes! Let’s discuss in detail the kinds of tax you will have to pay as a buyer in Pakistan.
Capital Value Tax
It is a provincial tax, which is paid by the buyer, at the time of the purchase. The Capital value Tax (CVT) is charged on the capital value of the asset in question. According to the Finance Act 2017, 2% of the capital value has to be paid by the buyer as the tax amount.
If you have received a property as a gift, on exchange, you will still be required to pay the Capital Value Tax; however, if you have received a property from a blood relative or a spouse as a gift or part of your inheritance, you will be exempted from paying the CVT. If you belong to the first category, then the value of your property will be calculated as per the valuation tables of your province.
Stamp Duty, under the Stamp Act 1899, helps the government keep track of the property transactions between individuals. If a document is stamped, the authenticity of the document increases in the eyes of the authorities. As per the stamp act, one of the laws safeguarding the property rights in Pakistan, the stamp duty is charged at 3% of the DC rates.
The stamp duty is coupled with 2% of the Capital Value Tax when paid.
This type of property tax is a federal tax that is paid by both the buyer and the seller. The withholding tax is also known as the advance tax, as it can be used as an advance on other taxes, such as the Capital Gains Tax of the seller. It has to be paid at the time of signing of the sale deed.
Buyers are liable to pay the tax, if the worth of the property in discussion is above PKR 4 million. They have to pay 2%, if they file an income tax return, otherwise, they have to pay 4%. Sellers have to pay 1% if they are tax filers, and 2% if they are non filers.
Determining the Tax Amount
As mentioned earlier, tax is charged at the annual rental value. The annual rental value is the approximate value that a property will deliver, if rented out.
Calculating the annual rental value is difficult, thus in order to help you, we have simplified the process. Each province has their own tax rate, to make it easy for you the provinces have provided the valuation tables, where they have given the numbers you require to calculate the taxes.
Using a property tax calculator is easy, however we have broken down the process, so it is easier for you to understand.
Find the category your property belongs to
Put the numbers from the valuation tables in the below mentioned equation
A = (Total land area of property) x (Per square yard rent prescribed in valuation table)
Figure out the values according to your category and out them in the equation below
B = (Total covered area of a property) x (Per square foot rent as per the valuation table)
Add the answers from the previous two steps and multiply it by 12. It will give you the Gross Annual Rental Value (GARV) of your property
Gross Annual Rental Value (GARV) = (A x B) x 12
In this step you have to deduct the tax charged by your province from the GARV.
For example, Property tax charged in Punjab is 10% of your GARV
Annual Rental Value = GARV – 10% of GARV
Each province has divided the property into different categories, based on their size etc.
To find out more about the valuation tables, exemptions or whether you want to generate an online property tax challan, visit the website of the respective department.
Government of Punjab: Excise, Taxation & Narcotics Control Department
Sindh Government: Excise, Taxation & Narcotics Control Department
Government of KPK: Excise, Taxation and Narcotics Control Department
Government of Balochistan: Excise, Taxation and Anti-Narcotics
With this we conclude our blog on the taxes charged on properties. We have also given you a brief overview of how to collect your property tax. We hope this blog helps you in understanding the type of property tax you have to pay and how to calculate it.
If you have any queries left, write to us at firstname.lastname@example.org