What is section 7e of the Income Tax Ordinance 2001

What is section 7e of the Income Tax Ordinance 2001. According to the FBR, a new section 7E was introduced through Finance Act, 2022. Whereby for the tax year 2022 and onwards, a resident person treated to have derived income equal to five percent of the fair market value of the capital assets situated in Pakistan which will be chargeable to tax at the rate of 20 percent under Division VIIIC of Part I of First Schedule of the Ordinance.

Following exclusions have been provided to which this section will not apply:

(i) One capital asset owned by the resident person;

(ii) Self-owned business premises from where the business carried out by the persons appearing on the active taxpayer’s list at any time during the year;

(iii) Self-owned agriculture land where agriculture activity carried out by the person but excluding farmhouse and annexed land. Farmhouse defined in this section;

(iv) Capital asset allotted to —

(a) A Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces;

(b) A person or dependents of a person who dies while in the service of Pakistan armed forces or federal or provincial government;

(c) A war wounded person while in service of Pakistan armed forces or federal or provincial government;

(d) An ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of federal and provincial governments. Who are original allotees of the capital asset as duly certified by the allotment authority;

(v) Any property from which income is chargeable to tax under the Ordinance and tax leviable has been paid;

(vi) Capital asset in the first year of acquisition on which tax under section 236K paid;

(vii) Where fair market value of the capital assets in aggregate excluding capital assets mentioned in serial nos. (i) to (vi) above does not exceed rupees twenty-five million;

(viii) Capital assets which owned by a provincial government or local government;

(ix) Capital assets owned by local authority, a development authority, builders and developers for land development and construction. Subject to the condition that such persons registered with Directorate General of Designated Non-Financial Businesses and Professions.

(3) The Federal Government may include or exclude any person or property for the purpose of this section.

ALSO READ: Balochistan High Court Issues Notices to FBR Regarding Section 7E

What is the Definition of Capital Asset?

(4) In this section–

(a) “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include –

(i) any stock-in-trade, consumable stores or raw materials held for the purpose of business;

(ii) any shares, stocks or securities;

(iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or

(iv) any movable asset not mentioned in clauses (i), (ii) or (iii);

(b) “farmhouse” means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an annex:

Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse.

Form for payment of tax on properties under Section 7E of Income Tax Ordinance 2001

FBR prescribed a form for taxpayers for payment of tax on immovable properties under Section 7E of the Income Tax Ordinance 2001. The tax on deemed income basis under the Income Tax Ordinance, 2001.

The FBR has issued SRO.1829(I)/2021 to issue a new form through proposed amendments to Income Tax Rules 2002.

As per the provided form, the FBR has asked the taxpayers to mention the total value of the capital assets taxable under section 7E; deemed income under section 7E and tax on deemed income under section 7E. The form has also prescribed separate columns for the cost/declared value and fair market value of the immovable property. This form has been given under the “Tax Chargeable/Payments” tab of tax return.

According to FBR, this notification, containing the form, would be applicable for the tax year 2022.