New tax is causing a slowdown in property transfers, say realtors

• Section 7E taxes individuals on the assumed rental income of their immovable property, regardless of its rental status.
• The slowdown in property transfers has negatively affected both the real estate sector and the overall economy.
• The government has not yet responded to the calls to repeal or amend Section 7E.

Since the enforcement of Section 7E (tax on deemed rental income basis) starting on July 1, 2023, over 95 percent of immovable property registrations and transfers have come to a halt.

During a meeting of the National Assembly Standing Committee on Finance on Wednesday, representatives from the real estate sector in major cities highlighted the adverse consequences of the mentioned provision in the law.

The Federation of Realtors Pakistan (FORP) informed the committee that property registries have experienced a staggering decrease of up to 95 percent, coupled with the suspension of transfers nationwide. This substantial tax increase has led to challenges for both local and overseas investors, causing capital to be moved abroad. Consequently, overseas investors are displaying hesitancy in making investments within Pakistan.

FORP stated that “deemed rental income under Section 7E is a thorn in the throat and it should be withdrawn. If not possible, then the filer should be exempted from it”.

The FORP suggested that if Section 7E cannot be avoided, it should only apply to plots. They proposed that filers should be allowed to proceed with transfers after submitting an affidavit, while non-filers should be subject to the charge.

The Finance Act of 2022 introduced Section 7E, which stipulated that starting from the tax year 2022 and beyond, every resident individual is deemed to have earned an income equivalent to 5 percent of the fair market value of their capital asset located in Pakistan. Certain exclusions for capital assets were outlined in the law.

The specified presumed income is subject to a tax rate of 20 percent (effectively 1 percent of the fair market value of immovable property).

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The Finance Act of 2023 has incorporated a fresh sub-section (2A) within Section 236C of the Ordinance. This sub-section restricts the registering, recording, or attesting of the transfer of any immovable property by the transferring authority unless the seller or transferor has settled their tax obligation under Section 7E of the Ordinance. The prescribed evidence of this settlement must be presented to the transferring authority in the specified mode, form, and manner.

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