Ever since the Income Tax Ordinance of 2001 was amended to include Section 7E in July 2022, it has sent shockwaves through the real estate sector. The subsequent legal developments, while benefiting the property market in Punjab, have further complicated the understanding of this section.
This blog is being written to demystify Section 7E and streamline information around it for easy understanding by all.
What is Section 7E of the Income Tax Ordinance 2001?
Without delving into legal jargon, what a common person needs to know about this section is that if a property is not being used by its owner, the Federal Board of Revenue (FBR) will consider it as earning rental income equal to 5% of its total market value. This rental income will then be subject to a 20% tax imposed by the federal government.
Why Is It Not Applicable in Punjab?
This section was challenged in the Lahore High Court on the grounds that it is not income tax that the federal government can collect, but rather a property tax that only local governments can impose. They argued that allowing the federal government to tax income derived from property would deprive local governments of a vital source of income and revenue.
The Lahore High Court sided with the petitioners and declared this section unconstitutional and illegal. Therefore, it does not apply to the sale, purchase, and transfer of immovable properties in Punjab, regardless of whether one is a filer or non-filer.
In addition to its non-applicability in Punjab, this section does not apply under certain other conditions as well. The FBR has updated Circular No. 01 of 2023-24 concerning the taxation of deemed income from property transactions through Circular No. 03 of 2023-24. The key features of this circular essentially eliminate the requirement for exemption certificates from the Commissioner Inland Revenue for different categories of taxpayers, including non-resident persons under Section 7E of the Income Tax Ordinance 2001.
When does Section 7E not apply:
- Section 7E doesn’t apply to properties owned by local authorities, development authorities, builders, and developers registered with the Directorate General of Designated Non-Financial Business and Professions (DNFBP).
- Section 7E is not applicable to properties in the first year of acquisition if tax under section 236K has been paid; a Computerized Payment Receipt (CPR) with details needs to be provided to the transferring authority.
- Section 7E does not apply to specific categories, including where the immovable property is allotted to Shaheed or their dependents, armed forces personnel, individuals wounded in war, ex-servicemen, individuals who die while in the service of the federal and provincial government, as well as ex-employees or currently serving personnel of the federal and provincial government, etc.
- Non-resident individuals, including non-resident Pakistanis, are exempted from paying tax on immovable properties under Section 7E.
When does Section 7E apply:
- Section 7E of the Income Tax Ordinance 2001 applies to Pakistanis living in Pakistan. It does not apply to Pakistanis living abroad or a Pakistani who is a resident taxpayer of another country.
- Non-resident individuals involved in property sale or transfer need to submit a completed Form-B and scanned copies of a valid passport.
- Non-resident Pakistanis must provide Form-B, along with a scanned passport, CNIC, NICOP/POC to the transferring authority.
- The transferring authority verifies information on Form-B before executing property transfers.
We hope you find this information helpful.
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