The Government of Pakistan has introduced a new section in the Finance Act, 2022 which levies tax on deemed income from immovable property. This section, called Section 7E, is applicable for tax year 2022 and onwards. It imposes a 20% tax on five percent of the fair market value of capital assets situated in Pakistan. In this article, we will discuss the details of this section and its exclusions.
What is Section 7E?
Section 7E is a new addition to the Income Tax Ordinance, 2001. It levies tax on deemed income from immovable property situated in Pakistan. It applies to resident persons who are deemed to have derived income equal to five percent of the fair market value of their capital assets situated in Pakistan.
What is Deemed Income?
Deemed income is an assumption made by the government that a certain amount of income has been earned by a person, even if they have not actually received it. In this case, the government assumes that the resident person has earned five percent of the fair market value of their capital assets situated in Pakistan.
What is Fair Market Value?
Fair market value is the price that a property would fetch in the open market under normal circumstances. It is determined by taking into account the location, condition, and other relevant factors of the property.
Exclusions:
The following exclusions have been provided under Section 7E:
- One capital asset owned by the resident person
- Self-owned business premises from where the business is carried out by the persons appearing on the active taxpayer’s list at any time during the year
- Self-owned agriculture land where agriculture activity is carried out by the person but excluding farmhouse and annexed land. Farmhouse has been defined in this section
- Capital asset allotted to:
- A Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces
- A person or dependents of a 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
- An ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of federal and provincial governments who are original allotees of the capital asset as duly certified by the allotment authority
- Any property from which income is chargeable to tax under the Ordinance and tax leviable has been paid
- Capital asset in the first year of acquisition on which tax under section 236K has been paid
- Where fair market value of the capital assets in aggregate excluding capital assets mentioned in serial nos. (1) to (4) above does not exceed rupees twenty-five million
- Capital assets which are owned by a provincial government or local government
- Capital assets owned by local authority, a development authority, builders and developers for land development and construction subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Businesses and Professions.
Conclusion:
Section 7E has been introduced in the Income Tax Ordinance, 2001 by the Finance Act, 2022. It levies tax on deemed income from immovable property situated in Pakistan. Resident persons are deemed to have derived income equal to five percent of the fair market value of their capital assets situated in Pakistan. However, certain exclusions have been provided under this section. It is important for taxpayers to understand the provisions of this section and its exclusions in order to comply with the tax laws of Pakistan.
