Understanding Section 7e of the Income Tax Ordinance 2001
Understanding Section 7e of the Income Tax Ordinance 2001. According to the FBR, a new section 7E was introduced through Finance Act, 2022. Here in this section, for tax year 2022 and onwards, every resident person (with some exemptions) has been assumed and treated to have earned as income, an amount equal to five per cent of the fair market value of the capital asset he owns in Pakistan.
What is Section 7e?
It means that every person will pay such tax if he holds more than one properties (Capital Assets with some exemptions) whose aggregate fair market value exceeds 25 Million Rupees. As prescribed above tax is chargeable at the rate of 20 per cent on 5% of the fair market value of that property. This 5% is treated as rental income derivable from such property.
Exemptions and Deductions
Section 7e also provides following certain exemptions for taxpayers:
(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.
Compliance and Reporting
After Lahore High Court (LHC) judgment, FBR has issued a Circular recently stating that Section 7E will not apply to cases falling under the jurisdiction of LHC, i.e. Punjab. As per circular No 3 of 2023-24, the section 7e will not apply in cases falling in the Jurisdiction of the Honourable Lahore High Court with reference to the Judgment in WP no. 52559 of 2022 dated 06-04-2023 unless the said judgment is reversed, suspended or vacated in an lntra Court Appeal or by the Honourable Supreme Court of Pakistan.
However, during filing of tax returns a form containing information regarding capital assets will have to be filed up and submit. Under this form named “Capital Assets”, information has been asked about property like, Address, Area unit, Area, Fair Market Value, taxable or not, reasons for non-taxable.
Section 7e not applicable to Non Resident Persons
Provisions of section 7E are applicable only on resident persons as defined in section 82 of the Income Tax Ordinance, 2001 . Non-resident individuals including non-resident Pakistanis are not required to pay tax under section 78, therefore the condition of mode and manner of furnishing of evidence to the transferring authority of immovable property notified through Circular No. I of 2023-24 will not apply on non-resident persons. However. non-resident individuals while selling or transferring immovable property, will furnish duly filled attached Form-B along with scanned copy of valid passport and in case of non-resident Pakistanis, in addition to Form-B along with scanned copy of valid passport, copy of CNIC,NICOP/POC to the transferring authority.
Restriction on non-ATL persons to claim benefits of capital assets exclusion under section 7E
Through Finance Act 2023, benefit of following capital assets exclusions mentioned at clauses (a), (e), (f) and (g) of sub-section (2) of section 7E of the Ordinance has been restricted to ATL persons only.
(a) one capital asset owned by the resident person;
(e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;
(f) capital asset in the first tax year of acquisition where tax under section 236K has been paid;
(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million;
However, this newly introduced proviso to sub-section (2) of section 7E will not apply on persons covered under rule (2) of Tenth Schedule to the Ordinance who are not required to file an income tax retun under section 114 of the Ordinance.
Amendment in section 236C
Finance Act 2023 has introduced a new sub-section (2A) in section 236C of the Ordinance which places a bar on the person responsible for registering, recording or attesting transfer of any immovable property to register, record or attest such sale or transfer unless the seller or transferor has discharged his tax liability under section 7E of the Ordinance and evidence to this effect has been furnished to the withholding agent.
In this regard, a separate circular No. I of 2023 has been issued describing mode, form and manner for furnishing evidence of the payment of tax under section 7E by both ATL and Non-ATL persons to the persons responsible for registering, recording or attesting transfer of any immovable property.
What Does Capital Assets Means?
“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);