FBR paves the way for the imposition of inheritance tax

Representative image of estate tax document – Canva/file

The Federal Revenue Office (FBR) has made significant adjustments to the withholding tax on capital gains from the disposal of real estate, paving the way for the imposition of an inheritance tax, said officials on Friday, with experts calling the move “unwarranted and arbitrary.”

The tax authority has included inherited and gifted property in its tax net by amending the Finance Act 2022 to impose an advance tax on sellers and buyers and collect capital gains tax ( CGT) on these goods.

The action is considered by tax experts as the establishment of a right of succession. “The federal government is prohibited from levying capital gains tax on inherited or gifted property. The law violates the Constitution,” an expert said.

“Apart from the need to increase the tax burden on income from real estate transactions, some of the changes made are unjustified, arbitrary and contrary to the principles of fair taxation,” added the expert.

The scope of the capital gains tax was extended to real estate in 2012. In addition to the imposition of a capital gains tax on the sale of real estate, a withholding tax revisable will also be collected from sellers of real estate.

The FBR circular clarified that the withholding tax was introduced for the purpose of providing a mechanism for collecting capital gains tax on the disposal of real estate.

“The actual amount of the capital gain and the tax payable on it should be calculated when filing the tax return,” the circular says.

“Section 236C is not a stand-alone provision and does not operate in isolation. Since capital gains tax was imposed only on the disposal of property held for a period of up to two years, therefore the withholding tax must also be collected from sellers who held the real estate for a period of up to two years.”

The FBR, in the following years, increased the withholding tax rate to 1% for filers and 2% for non-filers. It was also made applicable to property sold within the first four years of acquisition, with capital gains on property sold after a holding period of more than four years not being taxable.

The 2022 finance law increased the rate of withholding tax to 2% for declarants and 4% for non-declarants and made it applicable to all goods sold regardless of the period of detention.

“This creates an anomaly because capital gains tax will only apply to properties sold within six years of the date of purchase,” said another tax expert. “Thus, the principle set out in the FBR’s own circular is violated.”

Withholding tax levied from a person selling property not subject to capital gains tax will be forced to pay an amount of tax which they cannot set off against their capital gains tax , and if he has no other income tax to pay at the time of filing a tax return, he will be forced to go through the hassle of getting a refund of the withheld amount from FBR.

Interestingly, the Finance Bill contained a proposal to extend the scope of withholding tax to properties sold within ten years of purchase, but in the Finance Bill this limit was also removed. .

Another surprising change was the omission of subsection (4A) of Section 37 which imposes capital gains tax.

A capital gains tax is levied on the difference between the sale price and the purchase price of the property. In some cases, such as property acquired by inheritance or donation, the purchase price is nil, and the entire sale price would become the capital gain which would increase the tax burden.

To remove this constraint, the aforementioned paragraph (4A) has been added to Article 37. This provides that in the event of the sale of property acquired by gift, inheritance, etc., the fair market value of the property at the the time of acquisition of the property will be taken as its cost and the capital gains will be determined accordingly.

This legal provision which allowed for fair taxation has now been removed, and now the full sale price of these properties will be subject to capital gains tax, creating an unbearable tax burden and equivalent to the imposition of a tax on estates that the federal government cannot make under the Constitution, they concluded.

Originally published in The News

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