Impact of new taxation policy on real estate

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The long-awaited Pakistani budget for 2022–2023 has arrived, and as predicted, there are some significant policy shifts in the finance bill for 2022–2023. These shifts are most apparent in the Islamabad real estate or overall real state industry. If you’re confused about how the budget’s new tax provisions will affect the real estate industry, we hope to clear things up here.

Budget 2022-23 taxes will significantly affect the real estate market, but only if we break it down into three distinct subsectors. In a similar vein, the government has taken action. This is done to encourage investments in some real estate markets while encouraging them in others. This segmentation is necessary because some policies affect all three areas while others have no effect at all, and we need to know where to put our money in the coming year.

  • Plots and files sector where there is no construction on the land.

  • Construction sector such as houses etc.

  • Highrise apartments etc.

For taxation of these sectors, the government of Pakistan has announced three major policies in its budget for 2022-23.

  1. All three segments’ withholding taxes have been revised.

  2. The capital gains tax and its implications have been revised for the above segments.

Increase in withholding tax

The government increased the withholding tax in the Budget 2022-23 from 1% to 2% for filers and 5% for non-filers.

Impact on real estate of Pakistan

In general, an increase in withholding tax means an increase in transfer costs, which the real estate market views as a negative factor for real estate.

However, we do not believe this to be a significant enough factor to influence or initiate a real estate downtrend in this instance. This is a one-time fee that, while discouraging short-term trading, will be acceptable to most investors.

Capital Gain tax and its implications

This is where tax policies differ for each of the three types of real estate described at the beginning of this blog. First, it’s important to know what “CGT” is; it stands for “Capital gains tax,” and it applies only if your real estate investment yielded a profit.

Plots/files: CGT will apply if you sell a plot before six years and are exempted after 6th year.

House/built-up property: CGT will apply if you sell a house before four years and are exempted after 4th year.

Apartment/highrise: 15% CGT will apply for the first year and 0% tax from 2nd year.

Impact on real estate of Pakistan

The apartment industry has been encouraged, and it is clear that CGT is aimed at non-productive assets like plots and files, while the impact on the construction or buildup property sector, including houses, has been minimally revised.

Final Analysis

Following is a breakdown of how the proposed Pakistani budget for 2022-23 will affect the property market:

It’s bad news for plots, files, farmhouses, and other non-productive real estate assets. If these policies don’t change, this segment will start to decline.

It is a good budget for rented residential or commercial buildings because most policies remain in place.

The apartment market has been heavily incentivized, with CGT exemption after the second year and deemed rental income tax not applicable if rented out as built-up property as long as you are paying tax under section 15 of income tax. The new policies will have the greatest impact on this segment.