The Federal Board of Revenue (FBR) has recently issued instructions regarding the mode and manner for the payment of tax on the sale or transfer of immovable properties under section 7E of the Income Tax Ordinance 2001. These instructions aim to streamline the tax collection process and ensure compliance with tax regulations.
Understanding the Tax Collection Process
Under section 236C of the Income Tax Ordinance 2001, any person responsible for registering, recording, or attesting the transfer of an immovable property is designated as the transferring authority. This transferring authority is responsible for collecting advance adjustable income tax from the seller or transferor.
The rate of tax collection is 3% of the gross amount of consideration received by the seller or transferor if their name appears on the Active Taxpayers’ List (ATL). For non-ATL sellers or transferors, the tax rate is 6%.
Introduction of Section 7E
Through the Finance Act 2022, a new section called 7E was introduced. This section treats every resident person as having derived income equal to 5% of the fair market value of the capital asset situated in Pakistan. However, certain exclusions of capital assets are provided under sub-section (2) of this section.
The deemed income calculated under section 7E is chargeable to tax at a rate of 20%, effectively amounting to 1 percent of the fair market value of the immovable property.
New Sub-Section (2A) in Section 236C
The Finance Act 2023 brought about a new sub-section (2A) in section 236C of the Income Tax Ordinance 2001. This sub-section imposes a restriction on the transferring authority from registering, recording, or attesting the transfer of any immovable property unless the seller or transferor has discharged their tax liability under section 7E.
To ensure compliance with this new sub-section, the FBR has issued instructions outlining the mode, form, and manner of collecting and providing evidence of tax payments under section 7E.
Instructions for Sellers/Transferors on ATL
For sellers or transferors on the Active Taxpayers’ List (ATL), the following instructions apply:
Mode 1: Paying Tax with Income Tax Return
If the seller or transferor has not yet paid the tax under section 7E along with their income tax return for the tax year 2022, they are required to pay the due amount of tax and provide evidence of payment to the transferring authority. The FBR has introduced a separate payment challan (CPR) in the online payment system for this purpose. The payment made through CPR will serve as evidence of tax payment as per the newly inserted sub-section (2A) of section 236C.
Mode 2: Declaration in Income Tax Return
If the seller or transferor has already declared the property in their income tax return for the tax year 2022, or if they are not required to pay tax due to a stay granted by a court or authority, they must furnish a certificate issued by the Commissioner Inland Revenue holding jurisdiction over them. This certificate, known as Form ‘A,’ will be treated as evidence of tax payment under section 7E.
To obtain the certificate, the seller or transferor should fill the requisite particulars in Form ‘A’ and submit it to the Commissioner Inland Revenue. The Commissioner will examine the particulars and issue the certificate within 7 days of receiving the pre-filled Form ‘A’ submitted by the seller/transferor.
Instructions for Non-ATL Sellers/Transferors
For sellers or transferors who are not on the Active Taxpayers’ List (ATL), the following instructions apply:
The non-ATL seller or transferor must pay the due amount of tax under section 7E and provide evidence of payment to the transferring authority. Similar to sellers/transferors on ATL, a separate payment challan (CPR) is available in the FBR online payment system for this purpose. The payment made through CPR will be considered evidence of tax payment as per the newly inserted sub-section (2A) of section 236C.
Uniform Application of Procedure
These instructions have been issued to ensure the uniform application of the procedure by all transferring authorities. The FBR will monitor the feedback and implementation of these instructions and make suitable amendments if necessary.
It is important for sellers and transferors to comply with these instructions to avoid any delays or complications in the registration, recording, or attestation of the transfer of immovable properties.
The FBR’s instructions regarding the mode and manner for tax payments on the sale or transfer of immovable properties aim to streamline the tax collection process and ensure compliance with tax regulations. Sellers and transferors on the Active Taxpayers’ List (ATL) and non-ATL sellers/transferors have specific instructions to follow regarding the payment of tax under section 7E of the Income Tax Ordinance 2001. By adhering to these instructions, individuals can fulfill their tax obligations and facilitate the smooth transfer of immovable properties.