In a significant boost for Pakistan’s real estate sector, the federal government has decided to abolish the controversial 3% Federal Excise Duty (FED) imposed on the first sale of immovable properties. This decision, confirmed by senior officials within the Federal Board of Revenue (FBR), comes less than a year after the tax was initially introduced. The reversal is anticipated to take effect within April, pending necessary approvals from the cabinet and legislature.
Decision Follows Pressure and Constitutional Concerns
The government’s decision to backtrack on the FED follows sustained pressure from the real estate industry, legal challenges questioning the tax’s constitutional validity, and ongoing consultations with the International Monetary Fund (IMF). The IMF’s special budget mission is scheduled to visit Pakistan on May 14th to review the federal budget for the fiscal year 2025-26, making this move particularly timely.
The 3% FED on property sales was implemented as part of the FY2024-25 budget, targeting the initial sale or allotment of residential and commercial properties nationwide. The tax structure varied based on the buyer’s tax filing status, with filers paying 3%, late filers 5%, and non-filers 7%. However, the levy faced significant hurdles.
Legal Ambiguity and Negative Economic Impact Cited
A key concern was the legal ambiguity surrounding the federal government’s authority to impose such a duty on real estate, a matter constitutionally under provincial jurisdiction. This led to several legal challenges in the courts. Furthermore, unlike adjustable withholding tax, the non-adjustable nature of the FED increased the cost of property acquisition, discouraging investment and slowing down market activity.
According to FBR spokesperson Dr. Najeeb Memon, the Prime Minister’s Task Force on Housing strongly advocated for the FED’s abolishment. The task force highlighted both the constitutional grey area and the minimal revenue generated since its implementation. Additionally, real estate authorities across various provinces reportedly refused to process property transfers involving the FED, causing a backlog in registrations and a decline in state revenue.
Finance Minister Approves Proposal, Cabinet Decision Expected Soon
Finance Minister Muhammad Aurangzeb has already given his approval to the proposal, and the process to amend the Federal Excise Act has commenced. The cabinet is expected to formally approve the change within the coming weeks.
While the IMF has not yet issued an official statement, the timing of the repeal is significant, coming just before crucial budget negotiations with the international lender. The government is currently navigating a delicate balance, aiming to meet revenue targets set by the IMF while avoiding measures that could stifle economic growth, particularly in politically sensitive sectors like housing.
Broader Taxation Landscape Under Review
The now-abolished FED was not the only new tax measure introduced in the previous fiscal year. The government had also implemented:
- A flat tax on large homes and farmhouses in Islamabad.
- A 4% stamp duty on property transactions in Islamabad.
- A 10% income tax surcharge on high-income earners.
These measures faced strong opposition from real estate professionals and developers, who viewed them as punitive and detrimental to the already slowing economy. Sources suggest that the government is now considering rolling back some or all of these additional taxes in the upcoming budget.
PM’s Task Force Proposes Further Reforms
The repeal of the FED is seen as an initial step towards simplifying the complex property taxation system in Pakistan. The Prime Minister’s Task Force on Housing has proposed a wider range of reforms, including:
- Abolishing the ‘deemed rental income’ tax.
- Standardizing stamp duties across provinces and Islamabad.
- Eliminating Capital Value Tax (CVT) in Islamabad.
- Revising property valuations more frequently.
- Introducing tax breaks for specific categories like low-cost housing and first-time buyers.
- Reverting capital gains tax (CGT) to a slab-based system.
- Reducing taxes on construction materials.
Experts Welcome Move, Call for Long-Term Policy
Experts in the real estate sector have welcomed the repeal of the FED as a positive development. However, they emphasize that deeper issues within the sector, such as inflated prices, inconsistent regulations, and excessive taxation, require a more comprehensive and long-term approach.
“This decision at least removes an unconstitutional hurdle,” commented Ahsan Malik, a real estate dealer and member of the PM’s Task Force. “But reviving real estate needs a consistent, investment-friendly policy for the long term.”
The upcoming federal budget, expected around June 4th or 5th, will provide further clarity on the government’s strategy for restructuring the tax system while maintaining its commitments to the IMF. For now, the decision to abolish the FED offers a glimmer of hope for buyers and developers, potentially injecting much-needed momentum into the real estate market.
