What is Deemed Income Tax?

The government of Pakistan has imposed a new kind of tax on property called ‘Tax on deemed income’ under section 7E of the Income Tax ordinance 2001.

The FBR said that a new section 7E has been introduced through Finance Act, 2022 whereby for tax year 2022 and onwards, a resident person is treated to have derived income equal to 5% of fair market value of the capital assets situated in Pakistan which will be chargeable to tax at the rate of 20 %.

If we make it simple then a 1% tax liability is imposed by this new section 7E.

Interesting to note that it includes both plots and homes as residential plots usually fetch no income to the owner.

UPDATE ON DEEMED INCOME

The latest update was issued on November 22, 2022, through S.R.O, 2052 (l)2022. UPDATE. The FBR introduced the deemed tax form in October for the determination and collection of this tax. Now, the authorities have made the filing of the form mandatory for the filers. Even those who had already filed their returns are required to file the deemed tax form by 31st December 2022.

EXEMPTIONS

There are a few exemptions to Sec 7E as below:

(a) one capital asset owned by the resident person;

(b) self-owned business premises from where the business is carried out;

(c) self-owned agriculture land where agriculture activity is carried out by a person excluding farmhouse and land annexed thereto;

(d) capital asset allotted to:

• a Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;
• a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government;
• a war-wounded person while in service of Pakistan armed forces or Federal or provincial government; and
• an ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority;

(e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;

(f) capital asset in the first tax year of acquisition where tax under section 236K has been paid;

(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million;

(h) capital assets owned by a provincial government or a local government; or (i) capital assets owned by a local authority, a development authority, builders, and developers for land development and construction, subject to the condition that such persons are registered with the Directorate General of Designated Nonfinancial Businesses and Professions.

Capital Asset” means property of any kind held by a person, whether or not connected with a business, but does not include –

• (i) any stock-in-trade, consumable stores, or raw materials held for the purpose of business;
• (ii) any shares, stocks or securities;
• (iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or
• (iv) any movable asset not mentioned in clauses (i), (ii) or (iii);
• 41 (b) “farmhouse” means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an annex: Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse.

CONCLUSION

The Pakistan federal government has levied income tax on deemed income through section 7-E of the Income Tax Ordinance, 2001 but this section was not welcomed by the real estate sector of the country. The main objective of this initiative was to increase tax revenue to help the FBR achieve the tax collection target.

Review my blog on IAS -12 Income Taxes here: https://accountingblogger.com/ias-12-income-taxes/

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com