Property Valuation under the Income Tax Ordinance, 2001

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UPDATE FEBRUARY 2019: This article is subject to changes based on FBR Following SRO's

Latest SROs

1 112(I)/2019 Revision of Value of Immovable Properties of Bahawalpur 01-02-2019 
2 111(I)/2019 Revision of Value of Immovable Properties of Abbottabad 01-02-2019 
3 113(I)/2019 Revision of Value of Immovable Properties of Faisalabad 01-02-2019 
4 114(I)/2019 Revision of Value of Immovable Properties of Gujranwala 01-02-2019 
5 116(I)/2019 Revision of Value of Immovable Properties of Hyderabad 01-02-2019 
6 117(I)/2019 Revision of Value of Immovable Properties of Islamabad 01-02-2019 
7 119(I)/2019 Revision of Value of Immovable Properties of Jhelum 01-02-2019 
8 120(I)/2019 Revision of Value of Immovable Properties of Karachi 01-02-2019 
9 121(I)/2019 Revision of Value of Immovable Properties of Lahore 01-02-2019 
10 122(I)/2019 Revision of Value of Immovable Properties of Mardan 01-02-2019 
11 123(I)/2019 Revision of Value of Immovable Properties of Multan 01-02-2019 
12 124(I)/2019 Revision of Value of Immovable Properties of Peshawar 01-02-2019 
13 125(I)/2019 Revision of Value of Immovable Properties of Quetta 01-02-2019 
14 127(I)/2019 Revision of Value of Immovable Properties of Sahiwal 01-02-2019 
15 128(I)/2019 Revision of Value of Immovable Properties of Sargodha 01-02-2019 
16 129(I)/2019 Revision of Value of Immovable Properties of Sialkot 01-02-2019 
17 130(I)/2019 Revision of Value of Immovable Properties of Sukkur 01-02-2019 
18 115(I)/2019 Revision of Value of Immovable Properties of Gujrat 01-02-2019 
19 118(I)/2019 Revision of Value of Immovable Properties of Jhang 01-02-2019 
20 126(I)/2019 Revision of Value of Immovable Properties of Rawalpindi 01-02-2019 


Superceded SROs




Introduction


The treatment of property valuation in Pakistan for the purpose of taxation is probably one of the most complicated areas which has been clarified several times in past via various SRO's and Circulars.

There are currently several rates of valuation floating in market including the rate specified by district collector/revenue officer, the rate specified by Income Tax Department and the rate specified by valuators authorized by State Bank of Pakistan.

In this blog we will try to elaborate the treatment of valuation of property for the purpose of Income Tax Ordinance, 2001 in detail.

History of property valuation

Till 1986 the gain on sale of immovable property was subject to capital gain tax which later got taxable under the Stamp Duty Act, 1899.

Afterwards, CBR issued several circulars to control the unbridled powers of the Income Tax Officers during 1993 and 1994 and prescribed that circular rates to be adopted via circular 11 of 1993 and circular 11 of 1994;

In 1997 through SRO 550 I / 97 dated 25 July 1997 a new rule 207-8 was introduced to the Income Tax rules, 1982 in which the rates notified by the district collector was applied for the valuation of open plots for the purpose of unexplained assets under section 13 of the repealed Income Tax Ordinance, 1979.

Treatment under the Income Tax Ordinance, 2001
Currently, under the Income Tax Ordinance, 2001 any capital gain arising on the sale of immovable property within 3 years of acquisition is taxable under section 37 according to the prescribed rates.

After the introduction of Income Tax Ordinance, 2001 the taxability of capital gain on sale of immovable property has slightly changed as under:

1) The power to determine the fair market value of the property was specifically given to the Commissioner of the Income Tax under section 68 of the Income Tax Ordinance, 2001;

2) Although, the power to determine the fair market value was specifically given to the Commissioner as mentioned above, however, the board was empowered to make rules for the purpose of section 111 of the Income Tax Ordinance 2001 for the valuation of 'unexplained investment'.

The Board therefore introduced rule 228 of the Income Tax Rules, 2002 laying down the mechanism of valuation of 'open plot' in detail as per the rates specified by the district officer revenue collector of stamp duty.

3) On 19th May 2009,  the above mentioned rule was modified by SRO no 392 (I) / 2009 specifying the treatment of 'constructed property' other than open plot to be valued at the higher of fair market value (as per section 68 of the Income Tax Ordinance, 2001) or the DC rate prescribed by the district officer revenue collector.

Complications
By this time the investment in real estate boosted and became the hub for the purpose of evading tax and to park the black money.

This was due to the extreme variations between the DC rates and the fair market value as the prescribed DC rates were not revalued for 5 to 6 years.

Several attempts were made to resolve the issue by giving powers to the Commissioner to determine fair market value of the open plot under section 68 of the Income Tax Ordinance 2001, however, the same was strongly opposed.

Finally, proposal was given that the scheduled banks should be appointed as valuers by the State Bank of Pakistan for the purpose of valuation of immovable property under section 68 of the Income Tax Ordinance, 2001.

In the light of the above discussion the treatment of capital gain on the sale of immovable property under section 37 read with section 68 of the Income Tax Ordinance, 2001 and rule 228 of the Income Tax Rules, 2001 shall be the difference between selling price of the immovable property as prescribed by the Income Tax Department and the cost of the immovable property as prescribed by the DC rate and the same becomes taxable if the property was disposed off within 3 years of its acquisition.
Capital Gain = Selling Price (As per Income Tax Department Rates) - Cost (As per DC rates)


Differentiating between Advance Taxes under sections 236 C and 236 K of the Income Tax Ordinance, 2001

Section 236C of the Income Tax Ordinance, 2001 is applied at the time of sale of the immovable property and shall be collected from the seller at the specified rate.

The tax collected under this section shall be adjustable.

Exceptions for Section 236 C of the Income Tax Ordinance, 2001:
a seller, if the seller is dependent of:

(i) A Shaheed belonging of Pakistan Armed Forces; or

(ii) A person who dies while in the service of the Pakistan Armed Forces or the Federal and Provincial Governments; and

(iii) To the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.]

Whereas, Section 236K of the Income Tax Ordinance 2001 is applied at the time of Purchase of the immovable property and shall be collected from the buyer at the specified rate.

The tax collected under this section shall be adjustable.

Exceptions for Section 236 K of the Income Tax Ordinance, 2001:
Nothing contained in this section shall apply to a scheme introduced by the Federal Government, or Provincial Government or an Authority established under a Federal or Provincial law for expatriate Pakistanis; provided that the mode of payment by the expatriate Pakistanis in the said scheme or schemes shall be in the foreign exchange remitted from outside Pakistan through normal banking channels.

BELOW TABLE IS SUBJECT TO CHANGES AS PER THE SRO'S MENTIONED IN THE BEGINING OF THIS ARTICLE

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