The budget of 2019 has bought some staggering changes for the real estate industry and the government seems hell-bent to bring this business into the banking channel and so that they can reduce the size of undocumented money. In order to follow the implementations, they have taken some drastic measures. We will be analyzing these steps as well as compare them to how it was being done before so that you get a clear image of what has changed and where the Real Estate community stand. The following are the changes that the government has made in the 2019 budget.

  • Increment of FBR rates to 85% of Fair Market Value.
  • Reduction of Advance Tax 236K from 2% to 1%.
  • Removal of restriction from Non-filer to buy the property.
  • Charge of gain tax on normal tax regime and increasing holding period to 10 years for open plots and 5 years for the constructed property instead of 3 years.
  • All transactions relating to Real Estate must be done via the banking channel.
  • Increment of Section 236C WHT tax on the seller to 5 years instead of 3 years.
  • Abolishment of Section 236W.
  • Introduction of floating rate for Real Estate transaction by Sindh Govt.
  • Reduction in CVT from 2.5% to 1.5%
  • Reduction in Stamping from 2% to 1%
  • Introduction of new slabs for Rental Income from the property.
  • Abolishment of exemption of withholding tax on the purchase of property worth 4 million.

These are the major changes that took place in the budget of 2019 for the real estate industry. Let’s try to understand them so that we can know how much amount we will be paying on each transaction and compare it with previous years to have a clear understanding of where our industry has reached in the following years.

The following are the few case studies that will elaborate on how these new taxes will impact the purchases transaction of “Built-up” or “Open plots”. We have taken tentative rates of FBR and DC (Sindh) in different cases so that we can easily compare the taxes applicable and will be mandatory to pay now.

Case Study #1:

Transfer expenses of 500 yards Banglows situated in DHA Karachi for Purchaser according to new Federal and Sindh Budget.

In February 2019, FBR jacked up the Official rates to 60,000/sq. yard of built-up residential in DHA Karachi, this makes the value of a Double Story Banglows 3 Crore rupees. We will increase the above value by 50% as instructed in the “Asset Declaration 2019 “therefore making it 4.5 Crore as the official value in this case.

In this case, we are assuming the current DC values notified under Section 27-A dated 27/6/2016.

FBR value (Tentative) of a 500 yards Banglows = 45,000,000 (4.5 Crore)

FBR Advance Tax 1% on Purchaser = 450,000

DC Value (Tentative) of a 500 yards Banglows = 9,300,000 (93 Lac)

Total DC Taxes = CVT 1.5%, Stamping 1%, Registry 1% = Total 3.5 %

If we go by the newly floating rate introduced by Sindh Government in 2019 budget following will be the calculation:

Formula of Floating rate:

Value in the valuation Table/ Actual Value x (CVT + Stamping + Registry) 9,300,000/45,000,000 x 3.5% = 0.73%

0.73% is our floating rate, now we will multiply it with the value declared on Sale Deed.

45,000,000 x 0.73% = 325,500

Hence,

Total DC tax = ____325,000/-

Total FBR tax = ___450,000/-

Total Transfer Cost = 775,500/-

COMPARISION:

Total Taxes on Transfer of 500 yards Banglows notified by FBR on August 2016 = 1,233,800/-

Total Taxes on Transfer of 500 yards Banglows notified by FBR on Feb 2019 = 1,733,800/-

Total Taxes on Transfer of 500 yards Banglows in July 2019 by Case No 1 = 775,500/-

CONCLUSION:

If the federal government increases its FBR rates by 50% & the Sindh government does not increases its DC values then the resulting taxes will be much lower when compared to taxes in the previous year’s notified respectively by FBR on aug-2016 and feb-2019.

This will attract people to show maximum value as officials will discourage tax evasion and Black economy.

CASE #2 (BUILT-UP):

If Sindh Government increases its DC values and notifies them at half the value of FBR rates then the resulting taxes will be as follows:

FBR value (Tentative) of a 500 yards Banglows = 45,000,000 (4.5 Crore)

FBR Advance Tax 1% on purchaser = 450,000

DC Value (Tentative) of a 500 yards Banglows = 22,500,000 (2.25 Crore)

The formula of Floating rate:

Value in the valuation Table/ Actual Value x (CVT + Stamping + Registry)

22,500,000/45,000,000 x 3.5% = 1.75%

1.75% is our floating rate, now we will multiply it with the value declared on Sale Deed.

45,000,000 x 1.75% = 787,500

Hence,

Total DC tax = _____787,500/-

Total FBR tax = _____450,000/-

Total Transfer Cost = 1,237,500/

COMPARISION:

Total Taxes on Transfer of 500 yards Banglows notified by FBR on August 2016 = 1,233,800/-

Total Taxes on Transfer of 500 yards Banglows notified by FBR on Feb 2019 = 1,733,800/-

Total Taxes on Transfer of 500 yards Banglows in July 2019 by Case No 2 = 1,237,500/-

CONCLUSION:

If the federal government sector increases the taxes by 50% and Sindh Government increases the DC value and notifies them at half the value of FBR then the resulting taxes will be similar to what they were in the previous year’s which will be equal to the same volumes of Real Estate transactions that were being held before.

If Federal government increases its FBR rates by 50% from the (current table notified on February 2019) and Sindh government increases it DC values and notifies them at half the value of FBR rates then the resulting taxes will be similar to what they were at August 2016 resulting in same volumes of Real Estate transaction as were after August 2016.

CASE #3(BUILT-UP):

FBR value (Tentative) of a 500 yards Banglows = 45,000,000 (4.5 Crore)

FBR Advance Tax 1% on purchaser = 450,000

DC Value (Tentative) of a 500 yards Banglows = 45,000,000 (4.5 Crore)

The formula of Floating rate:

Value in the valuation Table/ Actual Value x (CVT + Stamping + Registry)

45,000,000 /45,000,000 x 3.5% = 3.5%

3.5% is our floating rate, now we will multiply it with the value declared on Sale Deed.

45,000,000 x 3.5% = 1,575,000

Hence,

Total DC tax = _____1,575,000/-

Total FBR tax =_____ 450,000/-

Total Transfer Cost = 2,025,000/-

CONCLUSION:

If the federal government increases its FBR rates by 50% & Sindh government brings its DC rates at par with FBR then the resulting taxes will be 291200/- which are higher than the taxes which were imposed on Feb-2019. The Sindh government has to reduce their tax rates or they do not need to bring it on par with FBR so that the taxation can be bearable. The aim should be to encourage people to go for documentation rather than focusing on tax evasion. Technically, the taxes should not be more than 2% by Federal or Provincial Governments.

t tax rates or does not bring it DC values at par with FBR rates to keep the tax ratio at a bearable threshold. The goal should be to encourage people to go for documentation, not tax evasion. Ideally, taxes should not be more than 2% by both Federal and Provincial governments.

CASE #5 (OPEN PLOT):

FBR value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore)

FBR Advance Tax 1% on purchaser = 315,000

DC Value (Tentative) of a 500 yards Open plot = 15,800,000 (1.58 Crore)

Total DC Taxes on open plot= CVT 1.5%

If we go by the newly floating rate introduced by the Sindh Government in 2019 budget following will be the calculation:

The formula of Floating rate:

Value in the valuation Table/ Actual Value x CVT

15,800,000/31,500,000 x 1.5% = 0.75%

0.75% is our floating rate, now we will multiply it with the value declared.

31,500,000 x 0.75% = 237,000/-

Hence,

Total DC tax =____ _237,000/-

Total FBR tax = _____315,000/-

Total Transfer Cost _= 552,000/-

COMPARISION:

Total Taxes on Transfer of 500 yards Banglows notified by FBR on August 2016 = 394,375/-

Total Taxes on Transfer of 500 yards Banglows notified by FBR on Feb 2019 = 1,021,125/-

Total Taxes on Transfer of 500 yards Open Plot in July 2019 by Case # 5 = 552,000/-

CONCLUSION:

If the Federal Government increases its FBR rates by 50% and Sindh Government increases it DC values and notifies them at half the value of FBR rates then the resulting taxes will be very close to the tax expenses in Aug-2016 and much less than the tax expenses in Feb-2019 upon transfer, resulting in same volumes of Real Estate transactions as were after aug-2016.

CASE #6 (OPEN PLOT):

FBR value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore)

FBR Advance Tax 1% on purchaser = 315,000

DC Value (Tentative) of a 500 yards Open plot = 31,500,000 (3.15 Crore)
Total DC Taxes on open plot= CVT 1.5%

If we go by the newly floating rate introduced by the Sindh Government in 2019 budget following will be the calculation:

The formula of Floating rate:

Value in the valuation Table/ Actual Value x CVT

31,500,000 /31,500,000 x 1.5% = 1.5%

1.5% is our floating rate, now we will multiply it with the value declared.

31,500,000 x 1.5% = 472,500/-

Hence,

Total DC tax =___ _472,500/-

Total FBR tax = ____315,000/-

Total Transfer Cost = 787,500/-

COMPARISION:

Total Taxes on Transfer of 500 yards Banglows notified by FBR on August 2016 = 394,375/-

Total Taxes on Transfer of 500 yards Banglows notified by FBR on Feb 2019 = 1,021,125/-

Total Taxes on Transfer of 500 yards Open Plot in July 2019 by CASE No 6 = 787,500/-

CONCLUSION:

If the federal government increases its FBR rates by 50% and Sindh Government brings its DC rates on par with FBR then the resulting tax will still be much lower than they were as compared to the new rates notified in Feb-2019 by the FBR. To keep the tax ratio bearable it is important the Sindh Government does not bring the rates on par with the FBR. Taxes should not be more than 2% by both FBR and Sindh Government. The aim should be to go for maximum documentation and not tax evasion.

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