June 26, 2006	Monday	Jumadi-ul-Awwal 29, 1427

IN Pakistan, property is taxed both at the provincial and federal levels. It is subjected to annual provincial tax on its rental value and in the form of registration fee at the time of its transfer from one hand to the other.

In the budget 2006-07, a two per cent capital value tax has been imposed on property deals exceeding 500 yards and a fixed five per cent tax on income from house rent.

In the past, the stamp duty led to transfer of a large number of properties, involving huge amounts, through power of attorney. To counter this, provincial governments came out with uniform rates on transfer of properties, situated in different localities, for payment of stamp-duty at the time of registration of sale-deeds. This has facilitated the documentation of sale transaction and enhanced the government revenues.

Now, the government has brought drastic amendments in Sec 15 and 17 of the Income Tax Ordinance-2001 relating to computation of net income for property liable to taxation as follows:

(a) A fresh sub-section six in Sec 15 has been inserted which renders the entire income under this section liable to tax en-block at the fixed rate of five per cent as per Division VI of part I of First Schedule.

By amending this section, the entire income from property accruing to any property owner and let out to any tenant, irrespective of his being the ‘prescribed person’, as defined in section 155, and even irrespective of quantum of rent, is now subjected to uniform rate of five per cent which if so really intended, is ‘gross violation’ of all cannons of taxation.

(b) Sec 16 relating to ‘pugri’ or ‘good-will’ amount over and above ‘actual rent’ is retained. The fate of its taxation is not known as the fixed rate of five per cent is confined to and provided in section 15 only.

(c) Sec 17 relating to deduction of permissible expenses is omitted, as the entire gross income from property in the hands of every owner is rendered liable to fixed rate of tax.

(d) Strangely enough, complementary section 66 is retained un-amended, despite the fact that the entire property income taxed at flat-rate, instead of progressive rates, the very purpose and utility of this section is lost and it has become redundant like section 17 omitted above.

(e) Sec 155 is also crudely amended by making confusion worse confounded and application of tax more complicated. Sub sec (2) of this section providing limit of rent at Rs0.3 million annually is omitted, whereas sub-sec (i) requiring the ‘authorized persons’ to deduct tax at source is retained.

(f) Sub-sec (2) is substituted by new sub-section which converts this withholding tax to presumptive tax by providing deduction of tax under sub-section (I) as the ‘final tax on the income from property’.

(g) Authorised person is amended by expanding its definition by further including all other persons as may be notified by the CBR for the purposes of this section.

By making such amendments, the government has converted property-income tax from a direct tax to an indirect tax because every landlord before letting out his property, would like to add this five per cent on income towards the rent to be borne by the tenant. Looking to demand and supply, it would not be difficult for the landlord to do so.

While insertion of five per cent fixed rate of tax on rental income exceeding, Rs0.2-3 million would be beneficial for and suit large-size posh buildings owners/tenants both, it would be tyrannical to landlords of un-prescribed tenants and also those middle-class widows/pensioners/senior citizens property owners who would be deprived of their concessions provided to all other income earners under first schedule Part I Division I tables.

While making this ‘make the rich richer’ amendment in property-income, the legislature failed to take cognizance of section 114(1)(a)(iii) which makes it compulsory of property- owner to file return of income. They have also omitted to insert section 155 after section 154 in sub-section (4) of section 115, which requires a statement to be filed instead of filing the return. It appears that it was under pressure of big landlords that these amendments were made post-haste without even doing necessary legislative homework.

The capital value tax levied under sec seven of the Finance Act 1989, has since been amended by Finance Act, 1990 from time to time. Sub-section (I) of section seven is amended by insertion of “power of attorney” also along with other modes of transfer of property, omitting tax on purchase of air ticket, and further defining (Urban Property).

In addition a new paragraph CA is inserted in sub-section (2) by virtue whereof two per cent tax is imposed on property measuring 500 square yards or more on its recorded value, and in its absence at Rs50 per square yard. Likewise two per cent tax is imposed on the recorded value of commercial property irrespective of its size, and in its absence at Rs50 per square yard, of the land area.

Rules and Regulations relating to collection of this tax remain un-amended. This is additional burden on property belonging to middle-class. The entire Finance Bill 2006 is designed to transfer progressive equitable burden of the rich to middle-class tax payer, further (broadening) base-of- earning burden to the poor through indirect withholding and presumptive taxes charged at fixed uniform rates from all and sundry alike.