Advance Tax Exemption for Overseas Pakistanis

In order to encourage international transfer of funds, the government has decided that the advance tax, according to Section 236K of the Income Tax Ordinance 2001, which is applicable on the purchase of any immovable property in Pakistan, should be exempted for overseas Pakistanis, including the non-residents.

Purpose of Exemption for Overseas Pakistanis

As an effort to enforce the documentation of property ownership, the authorities have been making efforts for a long time now. A lot of chaos and mismanagement can be expected otherwise. Due to illegal ownership or sometimes the same property is transferred under the names of two different people. Such situations take years and years to get solved and more often than not, even after such a time-consuming process, there is no possible remedy in sight.

Thus, in order to encourage people, Pakistan Stock Exchange (PSX) has taken a step towards the application of the process. A suggestion for exempting the taxes from immovable property was proposed for the overseas Pakistanis. It will accomplish two objectives; one is to encourage people to report their belongings and the other is to develop the real estate sector. In addition to this, the Federal Board of Revenue (FBR) will also allow small investors to come into the real estate business. It will decrease wealth inequality by giving a chance to less equipped people.

Sections 236K and 236C

According to section 236K of the Income Tax Ordinance 2001, it is clear that the tax was made essential on any purchase made for immovable properties. However, the PSX suggested an exclusion from advance tax for overseas Pakistanis, on property transfers to or from a REIT Scheme. The only tax that will be applicable is 236C which includes advance tax on transfer or sales. It also recommended removing the June 2023 expiration rule for all REIT types. Additionally, it is recommended to lower the 3% minimum tax rate for REIT Management Companies (RMCs), under Section 153 to match that of Asset Management Companies.

Additionally, non-resident Pakistanis will not be subjected to the requirements of section 100BA and rule 1 of the tenth schedule of the Tax Ordinance. The only people subjected to this criterion would be the non-resident Pakistanis who have a Pakistan Origin Card (POC) or NICOP (National Identity Card for Overseas Pakistan). Furthermore, transactions for the acquisition of real estate should be governed by sections 236K and 236C of the Tax Ordinance 2001. Please take note that the portions stated are about buying and selling real estate in Pakistan.

Non-Productive Real Estate Investments

The government’s decision to label real estate investments as non-productive and the recent budget’s doubling of taxes have had a significant detrimental impact on this industry. Moreover, the government needs to be aware of the numerous related industries and sectors that the real estate sector supports. Referring to the Punjab government, which as a result of the weak real estate market has cut the rate of stamp duty on urban areas from 2% to 1%.

Thus, due to the declining condition of the real estate market in Punjab, the government had to take a decision to drop stamp duty from 2 percent to 1 percent. Furthermore, the first section’s tax returns from the real estate area should be unveiled by the FBR (2022-23) after enforcing the Finance Act, 2022.

It is important to note that certain non-resident Pakistanis would not be required to file an income tax return according to applicable Ordinance requirements. Since their names do not come in the list of those who pay the taxes thus, they do not experience the negative consequences of rule 1 of the tenth schedule of the ordinance.

Non-Resident Pakistanis

Additionally, it is also decided that the provisions of section 100BA and rule 1 of the tenth schedule will not be applicable on the non-resident Pakistanis. Those who possess a Pakistan Origin Card (POC), or National ID Card for Overseas Pakistanis (NICOP) are included in this category, given that those transactions come under the horizon of sections 236C and 236K of the Ordinance, which are related to governing the purchase or sale of real estate in Pakistan.

This has been made possible by considering the fact that when a person receives a foreign salary or paycheck, then that person already has to pay a tax on that amount. So, exempting them for paying tax on immovable properties in Pakistan seems fair. Furthermore, a resident who is paying the taxes but earns through a foreign source, is granted an equal amount of money.

Analysis

In the light of the above argument, it can be said that the government of Pakistan has taken a good step. This is so because the economic status of people residing in Pakistan is declining day by day due to the aftereffects of COVID-19 and the prevailing political situation of the country. In such situations, it is hard to expect these people to do something for the economy because it is hard for them to feed their family members, as it is. Thus, in such a situation, one of the main assets for the country is the overseas residents.

These people are earning in dollars or pounds so for them, it is relatively easier to purchase real estate in the country. Even a person who is earning a moderate amount of income can still afford to invest here due to the exchange rate and international value of the rupee. Hence, providing benefits to this sector of the country can help alleviate the country’s financial status. Redemption of advance taxes will prove to be a motivating factor for them to invest in real estate in their own country. The reason for investing could be numerous, including investment purposes, generating a source of side income, building a house for their families, and so on. But the ultimate benefit will be for the country. Therefore, more such steps should be taken for further improvement.

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