FBR paves way for imposing inheritance tax

The FBR has made changes to the advance tax on capital gains from the sale of real estate.
Experts call the action “unjustified and arbitrary”.
Real estate was included to the capital gains tax’s purview in 2012.

Officials announced Friday that the Federal Board of Revenue (FBR) had made significant changes to the advance tax on capital gains from the sale of real estate, opening the way for the application of an inheritance tax. Experts called the action “unjustified and arbitrary.” By revising the Finance Act of 2022 to levy an advance tax on sellers and buyers and collect Capital Gains Tax (CGT) on such properties, the revenue authority has included inherited and gifted property in its tax net. Tax experts consider the step to be the imposition of an inheritance tax. “Capital Gains Tax cannot be collected by the federal government on gifts or inherited property. The act is unconstitutional “according to a professional. Despite the necessity to raise the tax burden on revenue from real estate transactions, the expert continued, “Some of the adjustments made are arbitrary, unwarranted, and go against the principles of fair taxation.”

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Real estate was included to the capital gains tax’s purview in 2012. A variable withholding tax will be taken from sellers of immovable property in addition to the capital gains tax that will be applied to such sales. According to the FBR circular, the advance tax was implemented to provide a framework for the collection of capital gains tax on the sale of immovable property. The circular instructed that “the real quantum of capital gain and tax payable thereon is to be estimated at the time of filing return of income.” “The provisions of Section 236C do not stand alone and cannot be interpreted as such. Since the Capital Gains Tax has only been applied to the sale of real estate held for a period of up to two years, advance tax must also be collected from sellers of real estate held for up to two years.” In succeeding years, the FBR raised the withholding tax rate to 1% for filers and 2% for non-filers. Since capital gains on properties sold after a holding period of more than four years were not taxed, it was also made applicable to properties sold during the first four years of their acquisition. The withholding tax rate has been raised by the Finance Act 2022 to 2 percent for filers and 4 percent for non-filers, and it is now applied to all sold properties regardless of the holding term. Another tax expert noted, “This creates an oddity because the capital gains tax will only be applicable on properties that are sold within six years of the date of acquisition.” Therefore, the FBR’s own circular’s guiding premise is being broken. A person who sells a property that isn’t subject to capital gains tax will have to pay withholding tax that he can’t deduct from his capital gains tax liability, and if he doesn’t have any other income tax due at the time he files his income tax return, he’ll have to go through the hassle of getting a refund from FBR. It’s interesting to note that the Finance Bill included a provision to expand the application of withholding tax to properties sold within ten years of their acquisition, but this restriction was also abolished in the Finance Act. The deletion of Section 37’s sub-section (4A), which applies capital gains tax, is another unexpected alteration. The difference between the property’s sale price and its purchase price is subject to capital gains tax. In some circumstances, such when a property is received as an inheritance or gift, there is no purchase price, and the entire sale price is considered a capital gain, increasing the tax burden. Section 37 was amended to include the aforementioned sub-section (4A) in order to alleviate this burden. This stipulates that the fair market value of the property at the time of acquisition shall be treated as its cost and capital gains will be calculated appropriately in cases where a property is sold that was acquired through a gift, inheritance, etc. The entire sale price of these properties will now be subject to capital gains tax, creating an intolerable burden of taxation and amounted to the imposition of an inheritance tax that the federal government cannot do under the Constitution, they concluded. This legal provision that enabled fair taxation has now been eliminated.

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