INTRODUCTION:

The Finance Act of 2022 introduced Section 7E of the Income Tax Ordinance, 2001 ("ITO"), which provides that movable properties owned by residents with a fair market value of more than PKR 25 million are subject to a 20% tax on the first 5% of that value, with some exceptions. This requirement was made applicable both retroactively and prospectively, or starting with the tax year 2022.

The majority of taxpayers had, however, disputed this clause, and several lawsuits had been submitted from all throughout the nation to the relevant province High Courts. The Sindh High Court's ("SHC") Order was upheld by the Supreme Court of Pakistan, which also issued a stay order in the appellants' favor, subject to the deposit of 50% of the tax demand. The appellant taxpayers were given permission to appeal the SHC Order.

As of right now, no movable property may be sold or transferred without providing proof to the transferring authority that the seller or transferer had properly paid the deemed income tax liability on the subject property. This requirement was added by the Finance Act 2023 (also known as "Act 23"). However, the Act 23 did not provide any guidelines or payment methods for the purposes of Section 236C(2A). The FBR published the following instructions about the form and manner of payment on July 21, 2023, in Circular No. 01 of 2023-24:

DIRECTIONS WHERE THE NAME OF THE SELLER OR TRANSFEROR APPEARS IN THE ATL:

A. In cases where the transferor or seller has not released:

If a person's deemed income tax liability is greater than the amount reported on their TY 2022 income tax return, they must pay the difference separately through the FBR's online payment system and present a Computerized Payment Receipt ("CPR") to the transferring authority. This will satisfy the requirements of the aforementioned Amendment.

THE FOLLOWING INSTRUCTIONS APPLY WHERE THE SELLER OR TRANSFEROR'S NAME APPEARS IN THE ATL AND HE/SHE HAS DECLARED THE SAID PROPERTY IN HIS SECTION 7E DECLARATION FILED ALONG WITH HIS TY 2022 INCOME TAX RETURN OR IS NOT REQUIRED TO PAY DUE TO STAY FROM ANY COURT OF LAW/AUTH:

A. When the transferor or seller has a Stay in place

Such a person shall be required to complete Form A, which is affixed to the issued Circular, and submit it to the relevant Commissioner, Inland Revenue, if he has obtained an order from any court or has declared the immovable property in his Section 7E declaration. After receiving the aforementioned Form A and reviewing the information that the taxpayer provided on it, the Commissioner must issue a certificate within seven days of receiving the completed Form A. For the purposes of Section 236C(2A), this certificate shall be adequate documentation.

However, there is no information or declaration on the Form A that the seller must fill out on any ongoing legal actions involving Section 7E for the taxpayer. The instructions only reference declaring property under Section 7E for Tax Year 2022, therefore it's unclear what the procedure would be for immovable assets purchased during Tax Year 2023.

Furthermore, it appears to be a redundant exercise if the intent of this Form A is to record the specifics of immovable property and the justification for exclusion from Section 7E, as such information is already included in the declaration for Section 7E under IRIS.

DIRECTIONS WHERE THE NAME OF THE SELLER OR TRANSFEROR APPEARS IN THE ATL BUT THEY ARE JOINT OWNERS:

A. When there are many owners of the property

If more than one person, then each person must pay down their individual deemed income tax debt using the appropriate methods described in paragraphs A and B.

 
DIRECTIONS WHERE THE NAME OF THE SELLER OR TRANSFEROR DOES NOT APPEAR IN THE ATL:

A. In cases where the person's name is omitted from the

second payment challan from the FBR's online payment system must be used to make the required payment in order to satisfy the modification provision of the contract.

WAY FORWARD

For individuals who have reported property under Section 7E on IRIS, an option in the online declaration under IRIS should be introduced to upload a certified copy of the Stay Order for the relevant tax year. This is because the top court has given a stay order subject to payment of 50% tax demand under Section 7E. With the FBR, a computerized database of taxpayers who currently have an active Stay order will be created. Additionally, IRIS should be used for the certificate application procedure. Once more, this will produce a digital record of the papers. Additionally, this might guarantee that the properties exempt from taxation under Section 7E and the impact of the stay order are included in the tax particulars online, which can then be shared with the person in charge of registering the immovable property by the FBR to help him ensure compliance with Section 236C(2A) in a more effective way.

DISCLAIMER:

His publication is owned by Tola Associates and Tola & Tola, and its contents cannot be used or duplicated for any reason without Tola Associates and Tola & Tola's prior written consent.

Unless otherwise stated, the information in this publication is based on the laws in effect as of the date and may not be exhaustive. The contents may vary as a result of changes in tax regulations, which occur sometimes. 

It is impossible to say with confidence that the author's views would be recognized or agreed upon by the tax authorities since the author's comments in the publication are a question of interpreting the law and are based on author's judgments and experience. Additionally, this publication makes no financial or other guarantees. For whatever reason, Tola Associates and Tola & Tola neither accept nor take on any liability.

To raise public understanding of taxes in the nation, this magazine is distributed online free of charge to the general public.

Saturday, July 22, 2023