Ayesha Saba

Significant changes have been made to the taxation regime for capital gains in the budget 2024-25, particularly targeting immovable property such as real estate. These adjustments are set to increase overall taxation in the market, potentially leading to less frequent property transactions. The government is expecting an increase of over Rs60 billion in tax revenue with this new regime, and has proposed to completely restructure the capital gains tax system for all assets and shares, including real estate, beginning on July 1, 2024. The new system introduces a flat tax rate on everyone and eliminates the benefits associated with longer holding periods, which used to benefit the common man and tax business people.   Assets acquired on or after July 1, 2024, a flat tax rate of 15% will be applied to all filers, regardless of the holding period, according to the federal budget 2024.

For non-filers, tax will be imposed at the standard slab rates from 15% to 45%, again irrespective of the holding period. Mohammad Shaaf Najib, an economist at the Pakistan Institute of Development Economics (PIDE), told WealthPK that the higher taxation was likely to reduce the frequency of property transactions. “By significantly increasing the tax burden on short-term sales, the government is discouraging speculative activity. This could lead to a slowdown in the number of transactions as investors reassess their strategies,” he remarked. He highlighted the difficulties in effective implementation, saying that the Federal Board of Revenue would need to bolster its enforcement mechanisms to ensure compliance and prevent evasion.

“The success of this initiative hinges on effective monitoring and strict enforcement because the real estate sector has a history of underreporting and undervaluing property transactions, which could undermine the effectiveness of the new tax regime.” “The real estate market in Pakistan has been a major avenue for wealth accumulation for the elite. By taxing capital gains more effectively, the government can reduce income inequality and use the additional revenue for social programmes,” he said. Najib further argued that a well-regulated and taxed real estate market could lead to more balanced economic growth. “The increased revenue from higher capital gains tax should be utilised for public infrastructure and social welfare programmes, contributing to overall economic development and reducing income inequality.”

Credit: INP-WealthPk