Impact of Budget 2022-23 on The Real Estate Industry

The long-awaited Pakistani budget for 2022–2023 has been released recently, and as predicted, there have been some significant policy changes in the 2022–2023 finance law, particularly concerning the real estate sector. If you’re unclear about how the budget’s new taxes will affect the real estate industry, most of your questions will be answered in this blog.

The real estate industry must be divided into 3 categories in order to comprehend the true effects of the taxes in the Budget 2022–23 on the real estate market. The government also did the same.

This has been done specifically to encourage investment in some real estate segments while discouraging it in others. The 3 categories are:

1. Plots and files sector where there is no construction on the land.
2. Construction sector such as houses.
3. Highrise apartments etc. 

Three significant initiatives involving the taxes of these groups have been announced by the Pakistani government in the budget for 2022–2023: 

1. The withholding taxes have been revised for all three categories. 
2. For all of the aforementioned segments, capital gain tax and its implications have been revised.
3.  Real estate holdings and assets will be taxed on a deemed rental income above 25 million.

Increase in Withholding Tax 

Withholding tax is the amount that must be paid by the property buyer before transferring the land to his name. All three real estate categories will be impacted by this factor. The government raised the withholding tax in the Budget 2022–2023 from 1% and 2% for filers and non-filers respectively, to 2% and 5%.

This is a considerable increase, particularly for non-filers. This will massively increase the price of transferring plots.

Impact of Change in Withholding Tax on Real Estate Sector 

Generally speaking, an increase in withholding tax results in an increase in transfer expenses, which are seen negatively by the real estate market.

However, there is very less probability that this will significantly influence or start a sudden downturn in the real estate market. Although it may discourage short-term trading, this one-time expense will be acceptable to the majority of investors.

Capital Gains Tax

The government has increased the amount of time a property is exempt from capital gains tax (CGT) from four to six years. As a result, there will be fewer real estate transactions because owners are more inclined to keep their plots for longer. This is done to encourage people to invest their money in profitable ventures as opposed to just holding onto it in unprofitable assets.

The new policy states that the tax rate will be 15% if you own the property for a year. This tax rate will decrease by 2.5% annually. As a result, after two years, you will have to pay 12.5% of your income in taxes, followed by 10% after three years, 7.5% after four years, 5% after five years, and 2.5% after six years. And if you’ve owned a property for more than six years, you will not have to pay the tax.

The applicability of capital gains tax is different for all three real estate segments. CGT will be applicable if you sell a house before 4 years, and in the case of highrise buildings or apartments, 15% CGT will be applicable for the first year and 0% from the second year.

Impact of Amendments in CGT On The Real Estate Sector 

As you can see, the focus of CGT is on non-productive assets like plots and files, although the impact on the building or development of the property, such as houses and other structures, has rarely been amended. In addition, the apartment industry has been given incentives.

It can be predicted that future policies of the Government will also be in this direction since the FBR team publicly said that the purpose of adopting this policy for CGT is to encourage individuals to invest in apartments and vertical expansion.

Deemed Rental Income On Non-Productive Real Estate

The actual aim of this wealth tax is non-productive properties like plots and files. On the underused or additional property worth more than 25 million, the FBR has imposed a 1% Deem Tax according to the FBR value. This includes unoccupied homes, vacant lots, abandoned farms, and any land holding with a value of more than 25 million but no recurring revenue.

 The government has estimated that these properties will generate an annual income of 5%, of which 20% will be taxed, or 1% of their FBR value:

• Your personal house is exempted from this tax.
• It will be assessed based on the total FBR value of all your plots. For instance, if you own 10 plots with a total FBR value of 100 million, the first 25 million will be free from tax, while the remaining 75 million will be taxed at a rate of 1% of FBR value, or 7.5 lacs a year.
• You will be required to pay the presumed rental income tax on any built-up property, such as a home, a business, or another structure, that is not being rented out.

The wealthiest among us are the main targets of this tax since they invest in numerous plots that don’t generate rental income and homes that they rent out etc. without disclosing their rental income.

Impact on Real Estate 

Plot sales will suffer the most because they don’t generate any rental income and turn into a liability. The people who have accumulated this level of wealth can undoubtedly pay this amount of tax, but future investments in properties that don’t generate rental income will undoubtedly suffer greatly.

Smaller societies, which serve the lower middle and middle classes, may have some resilience and continue operating unaltered. The more wealthy communities, like DHA and Bahria Town, where investors have made large investments, will shake because of this. And when the big boys fall, the lesser communities will also be affected.

The goal is to discourage investors from holding more than 25 million in useless assets such as farmhouses, files, plots, and other real estate.

Conclusion 

• If these rules stay the same, we will enter a downfall because it is particularly negative for plots, files, farmhouses, or any other unproductive real estate asset.
• It is a suitable budget for built-up properties that are rented out, such as houses or businesses because most things remain the same and the continuity of policy is always a good idea.
• Apartment rentals are exempt from CGT after the second year, and if they are rented out as built-up property, presumed rental income tax is also not applicable as long as you are paying income tax under section 15 of the Internal Revenue Code. Under these new policies, this industry will get the most investment.

The government wants investors to concentrate their real estate trading and investment in highrises and apartments, as well as in actual enterprises and industries.

Al Sadat Marketing will answer all your queries regarding property taxes and their implications. 

You can also invest in other famous and most in demand housing societies, such as , Blue World City,  Rudn Enclave, 7 Wonders City Peshawar, Taj Residencia, Kingdom Valley,  New Metro City Gujar Khan, Forest Town Rawalpindi, University Town Rawalpindi, ICHS Town, Park View City Islamabad, Multi Gardens B17 Islamabad and Nova City Islamabad.

Al Sadat Marketing please contact 0331 1110005 or visit https://alsadatmarketing.com/

Few more real estate housing schemes which are trending now a days in Islamabad by including: Faisal Town Phase 2, Prism Town Gujar Khan, New City Paradise, Eighteen Islamabad, 7 Wonders City Islamabad, Capital Smart City,  Silver City Islamabad, The Life Residencia,  Faisal Town Islamabad, Islamabad Golf City, Islamabad Model Town and Marble Arch Enclave.

Al Sadat Marketing is an emerging Real Estate Agency headquartered in Islamabad, Pakistan. With over 10+ Years of experience, Al Sadat Marketing is providing its services and dealing all trending housing societies projects in different cities of Pakistan. Islamabad Projects, Rawalpindi Projects, Gujar Khan Projects, Burhan Projects, and Peshawar Projects etc.

Book Your Plot Now: +92 331 111 0005