The Federal Board of Revenue (FBR) is striving to make ends meet for the country amid the mounting pressure from the IMF. In the series of efforts to achieve revenue targets, the latest move comes in the form of a warning to name and shame those defaulting on Capital Value Tax (CVT) and deemed rental income tax.
The aforementioned taxes were introduced in the latest budget in an attempt to reinstate wealth taxes for additional revenue generation.
The CVT is applicable on cost of motor vehicles value in excess of Rs5 million (in Pakistan) at a rate of 1 percent and at the same rate on the cost of movable and immovable foreign assets of an individual having value in excess of Rs100 million.
The latter provision regarding CVT is where the conflict arises. Those against the applicability of this tax have challenged it as discriminatory, beyond the jurisdiction of the federal government and against the spirit of the 18th amendment.
“In case of foreign assets that were taxed under declaration laws there was a sovereign guarantee to ensure no further taxability of declared assets. However, the CVT seems to go against that assurance, and this might become a hindrance in its implementation,” said Asim Zulfiqar, Senior Tax Partner of AF Ferguson & Co. Chartered Accountants in ICAP’s post-budget conference.
Therefore, the applicability of the CVT was challenged in the high courts but petitions were dismissed as the courts were of the opinion that the federation is well within its right to charge a wealth tax on foreign assets.
The other provision, and probably the more controversial one, is regarding the taxation of immovable property to discourage the accumulation of investment in the unproductive asset class. As per the Finance Act, 2022, a resident person shall be treated to have derived (barring a few exemptions), an income equal to 5 percent of the fair market value of capital assets situated in Pakistan. Subsequently, the income would be charged a tax at the rate of 20 percent from tax year 2022 onwards.
This provision was challenged as the aggrieved found the tax to essentially be a wealth tax being charged on the “Fair Market Value” of property.
“The implementation section 7E (deemed income) of the finance act is not permissible as it is in contradiction with the entry 50 of federal legislative list which restricts the federal government from charging CVT on immovable property,” said Dr Ikramul Haq, a senior lawyer and adjunct faculty at LUMS.
However, the Sindh High Court thought otherwise and dismissed the petition against the tax law. As per sources, FBR followed with dispatching notices to those who failed to deposit amounts payable under the deemed income tax.
Yet, the Balochistan High Court has issued a stay order against the FBR regarding taxation under the section 7E while the Lahore High Court has reserved its decision on the matter.
If CVT cannot be charged on immovable property then Pakistan as a country cannot prosper and will be a rent seeking economy.
All developed states have a similar tax to keep developed land from being used primarily as investment and a business venture instead of building it up and used as housing unit(s). Lack of causes artificial increase in land price and reduced availability of housing for the people. Bourgeois in Pakistan is built on allotment of prime land and is a major cause of economic stagnation and poor national revenues despite a rich middle class.
Judiciary also holds unproductive plots and allocated land that is to be taxed under deemed income tax reforms which interestingly is the biggest reform to hit rich middle class. Conflict of interest has to be resolved and honourable judges asked not to thwart this change as it is in public interest.
Media needs to discuss its basis and impact. Next Khabar Say Agay about FBR land reforms introduced by SS government.