Understanding the Background

The circular 03 of 2023-2024 acknowledges the numerous representations received by the Board, reflecting concerns and queries regarding the application of Section 7E of the Income Tax Ordinance, 2001. These representations have highlighted the importance of providing clear guidance to ensure compliance with tax obligations related to the sale or transfer of immovable property.

Modification of Previous Instructions

One of the most critical aspects of the circular is its modification of previous instructions outlined in Circular No. 1 of 2023-24, dated July 21, 2023. It clarifies that certain provisions from the previous Circular No. 01 of 2023-2024 will not apply within the jurisdiction of the Lahore High Court, as per a specific judgment. However, this exemption is subject to the judgment’s status, potentially changing if it is reversed, suspended, or vacated by an Intra Court Appeal or the Honorable Supreme Court of Pakistan.

Change in Tax Year Reference

The Circular No. 03 of 2023-2024 also updates the reference to “tax year 2022,” expanding it to include “Tax Years 2022 and onwards.” This change aligns the circular with evolving tax regulations.

Exemptions from Certain Conditions

The Circular No. 03 of 2023-2024 introduces exemptions from specific conditions related to evidence submission for certain categories of individuals or properties. Non-resident individuals, including non-resident Pakistanis, are no longer required to pay tax under Section 7E of the Income Tax Ordinance, 2001. Instead, they must provide specific documentation, including Form-B (as difined in Circular No. 03 of 2023-2024) and passport copies.

Furthermore, individuals related to the Pakistan Armed Forces and government services receive exemptions from evidence submission requirements. This exemption also extends to properties allotted to Shaheed or dependents of a Shaheed, individuals who die in government service, and war-wounded individuals.

Farmhouses and Agriculture Property

The Circular No. 03 of 2023-2024 distinguishes between self-owned agriculture properties used solely for agricultural purposes and properties with farmhouses. Self-owned agriculture properties not used for non-agricultural purposes are exempt from Section 7E of the Income Tax Ordinance, 2001. However, when farmhouses are present on agriculture properties, regular rules apply.

Exemption for Certain Entities

Intriguingly, the Circular No. 03 of 2023-2024 outlines that Section 7E of Income Tax Ordinance, 2001 does not apply to immovable property owned by local authorities, development authorities, and builders and developers for land development and construction. To qualify for this exemption, these entities must be registered with the Directorate General of Designated Non-Financial Business and Professions (DNFBP). Specific certificates and documents are required for this exemption to be valid.

Validity and Future Automation

The Circular No. 03 of 2023-2024 emphasizes that it will be valid until an automated system is developed for this purpose. This underlines the importance of staying updated with future developments in taxation procedures.

Conclusion

In conclusion, Circular No. 03 of 2023-24 brings several significant changes and clarifications to property tax under Pakistan’s Income Tax Ordinance, 2001. These changes aim to streamline the process for taxpayers and authorities, ensuring compliance with tax obligations. It is crucial for individuals involved in property transactions to stay informed and adhere to the guidelines provided in this Circular No. 03 of 2023-2024 to avoid potential issues in the future. For the latest updates on tax regulations and compliance, stay tuned to reliable sources and official government announcements.

Key Points from Circular No. 01 of 2023-24

Tax Collection Rates

The Circular 01 of 2023-24 establishes the tax collection rates for property sales or transfers. Sellers or transferors on the Active Taxpayers’ List (ATL) are subject to a 3% tax on the gross amount of consideration received, while those not on the ATL face a 6% tax.

Deemed Income for Capital Assets

Circular 01 of 2023-24 introduces the concept of deemed income for capital assets. As of Tax Year 2022, every resident individual is deemed to have derived an income equal to 5% of the fair market value of their capital asset in Pakistan. This deemed income is subject to a tax rate of 20%, effectively 1% of the fair market value of immovable property.

New Sub-section (2A)

Finance Act 2023 brought forth a significant change by introducing sub-section (2A) in Section 236C of the Income Tax Ordinance, 2001. This sub-section mandates transferring authorities to verify that the seller or transferor has settled their tax liability under Section 7E of the Income Tax Ordinance, 2001 and has provided evidence of this in a prescribed mode, form, and manner.

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Compliance Procedures for Sellers/Transferors on ATL

Mode 1: Payment Challan (CPR)

If the seller/transferor hasn’t paid the tax under Section 7E of the Income Tax Ordinance, 2001 alongside their income tax return for Tax Year 2022, they must use the separate payment challan (CPR) in the Federal Board of Revenue (FBR) online payment system. This CPR payment serves as evidence of tax payment.

Mode 2: Commissioner Inland Revenue Certificate – Form ‘A’

For those who have already declared the property in their Section 7E declaration for Tax Year 2022 or are exempt from paying tax due to court orders or authorities’ stays, they should provide a certificate known as Form ‘A.’ This certificate is issued by the Commissioner Inland Revenue having jurisdiction over the seller/transferor and serves as evidence of compliance.

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Compliance Procedures for Sellers/Transferors not on ATL

Non-ATL sellers/transferors are required to pay the tax under Section 7E of the Income Tax Ordinance 2001 and provide evidence to the transferring authority using the CPR provided in the Federal Board of Revenue (FBR) online payment system.

Uniform Application of Procedure

These instructions aim for uniform application by all transferring authorities across Pakistan. Any necessary amendments will be made based on feedback and monitoring of the procedure to ensure efficient property tax compliance.

In conclusion, Circular 01 of 2023-24 brings clarity and consistency to property tax regulations in Pakistan. Sellers and transferors must adhere to the specified tax rates and compliance procedures outlined in this Circular No. 01 of 2023-24. The government’s goal is to create a fair and transparent system for property taxation that contributes to the nation’s revenue while ensuring the rights of taxpayers are protected.

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