The 7e property tax issue has sparked considerable debate in Pakistan’s real estate sector, with recent developments indicating potential relief for taxpayers. The Federal Board of Revenue (FBR) introduced the 7e tax in 2022, mandating a 1% annual property tax on properties valued above 25 million rupees based on FBR-assessed market rates. While there were exceptions for properties used for agriculture, rental purposes, or personal business, as well as some relief for government pensioners, the tax has faced widespread criticism for its perceived unfairness.
Key Issues with the 7e Tax
- Double Taxation: Taxpayers argue that the 7e tax effectively creates a double taxation scenario. First, they pay the annual property tax even if no income is generated from the property. Later, when the property is sold, they are subject to capital gains tax (CGT). This has been highlighted as a major grievance by stakeholders, who feel it penalizes property owners unnecessarily.
- Impact on Real Estate Business: The 7e tax has contributed to a stagnation in the property market. Real estate professionals have reported declining buying and selling activity due to the financial burden of increased taxation, which has discouraged investment in the sector.
- Supreme Court Delay: Multiple High Court rulings, including from Lahore and Islamabad, have favored taxpayers challenging the 7e tax. However, the FBR escalated the matter to the Supreme Court, where the case has remained pending for over a year. The delay has left stakeholders in limbo, forcing taxpayers to either pay the tax to avoid penalties or risk non-compliance while awaiting a decision.
- Revenue Shortfall: Contrary to the FBR’s expectations of increased revenue collection through the 7e tax, the actual inflow has reportedly declined. Inflation and reduced market activity have exacerbated the shortfall, with collections falling below pre-tax levels.
Recent Developments
In light of these challenges, a meeting was recently held between real estate representatives and the FBR Chairman, during which the issues surrounding the 7e tax were discussed extensively. The real estate stakeholders emphasized the tax’s negative impact on the market and questioned the logic of taxing unrealized gains.
The FBR has acknowledged the concerns and is reportedly reviewing the policy. A joint committee is being formed to evaluate potential solutions, which may include:
- Abolishing the 7e tax entirely.
- Revising the tax basis from FBR-assessed market value to the original cost of the property.
- Introducing a consolidated tax model that integrates transaction taxes, the 7e tax, and CGT into a simplified structure.
Capital Gains Tax Update
A new rule effective from July 2024 introduces a flat 15% CGT on profits from property sales, regardless of the holding period. Previously, properties held for more than six years were exempt from CGT. This change adds another layer of complexity to property taxation, further straining the sector.
The Path Forward
The FBR’s newfound flexibility, coupled with its recognition of the real estate sector’s struggles, signals a potential policy shift. While no formal decision has been made, there is optimism that the 7e tax may be abolished or significantly revised in the near future. Stakeholders are advised to remain vigilant and cautious about paying the tax, as refunds are unlikely if the Supreme Court ultimately rules against the FBR.
