Nations are built or destroyed by the contributions of their citizens to the core values of their cause. Historically speaking, most nations are founded for more or less the same principles; to protect their kin, defined through the unity of language, religion, culture or even race. Some have all these factors in common; some only one, and some nations, albeit very few, are even unified in their diversity. This begs the question, how is sincerity measured? For a country to prosper, every citizen must contribute to the betterment of the state. The primary way that citizens contribute to the functioning of their body politic is through taxes. That is the metaphorical Social Contract that Hobbes, Locke, and Rousseau believed was the foundation of modern society, and assuredly it is, the quid pro quo of rights and duties notwithstanding.
Why are Taxes Important?
Tax, in simpler terms, is the backbone of any nation. It enables every state to operate its machinery and exercise its sovereignty in all spheres. In layman’s terms, tax is a payment made to a government in exchange for the provision of stately services, including but not limited to the preservation of the citizen’s lives, liberty, property and their proclivity to pursue happiness. Tax enables states and governments to provide these functions to the citizenry. It should become fairly obvious at this point that a government cannot function in absence of tax revenue, and also that those countries where citizens are eager to contribute as much as they are able, tend to have the highest standards of living in the world. These truths are self-evident and universal, provided that governments do not spend the wealth of their citizens frivolously. However, therein lies the beauty of the Social Contract. Governments that are not frugal and wise with the wealth of their citizens generally find themselves at the head of banana republics or failing states and in charge of a citizenry that would rather see the infrastructure collapse than see their hard-earned finances go to waste.
Having established that tax is indispensable for the mundane functioning of national institutions, it may be prudent to consider the types of taxes and their ramifications on the national exchequer. For this blog, we will consider property tax in Pakistan so that you, a potential investor, or so we hope, can be better equipped to understand where and how your tax rupees are collected and spent.
Who are Tax Filers and Non-Filers?
To begin with, you might want to understand the concepts of a tax filer and non-filer. A tax filer is a citizen of Pakistan whose name appears in the Active Taxpayers’ List issued by the Federal Board of Revenue every Monday of every week. Anyone whose name does not appear on the List is a non-filer. Filers have the advantage of not having to prove sources of income while purchasing vehicles and other immovable properties. Any non-filer who purchases a vehicle or an immovable asset has forty-five days to become a filer or provide a detailed explanation of their sources of income. The process of becoming a filer takes about six minutes and is fully digitized.
A property tax is levied on anyone who is involved in dealing with property in Pakistan. Whether you are purchasing, selling or renting out a property, you have to pay a tax on it. Real-Estate taxes in Pakistan are levied based on the annual value of the land. Simply put, this means that if the land, be it an urban immovable property or even a simple plot, were put on rent for a year, a percentage of tax would be deducted from the total earnings. This percentage varies from province to province. In Punjab, property holding tax, referred to as Capital Value Tax, is 5% of the annual projected income of the property, while in Sindh it is 25%. Now, this may seem like a huge difference, but it is not. The secret lies in the way the Sindh government calculates annual values. Prices in the valuation table are set much lower than those in Punjab. Therefore, Sindh’s 25% property tax ends up in the same bracket as Punjab’s 5%. For Balochistan, property tax is calculated based on the Annual Rental Value of a property. The Annual Rental Value, or ARV, is the total amount of money earned by the property if it were put up for rent for a year. For properties that have an ARV below PKR 12,000 will be taxed at 10% of their total annual income, and property with an ARV of PKR 15,000 will be taxed at 15% per annum. 10% of the Gross Annual Rental Value is taken out for maintenance and the property taxed accordingly.
If a property has a monthly rent of PKR 1000, then its ARV (annual Rental Value ) will be PKR 12,000. After a 10% deduction for maintenance charges, the Gross ARV will be PKR 10,000. The ARV will then be 10% of PKR 10,000, meaning PKR 1000.
The size of the asset does make a difference indeed on how much tax is levied. For instance, a house built on 5 marlas will have almost no property tax whatsoever or very little tax for the most part. Also, tax exemptions are made for minor orphans, widows, disabled individuals, or for properties where the annual value does not exceed PKR 4320 or PKR 6480 if occupied by the owner and their family.
For the sake of convenience, let us consider an example of how a hypothetical individual would pay property tax in Pakistan. Let us assume that a gentleman named Mr. Haaris, for this exercise, wants to buy property in Pakistan. He contacts a real estate agency, say, for example, Green Earth Real-Estate, and gets in touch with a landowner, willing to sell his property, named Mr. Waleed. Mr. Haaris will have to pay something called the Capital Value Tax (CVT) and Stamp Duty (SD). The CVT is levied at 2% of the total value of the property, and the SD is levied at 3% of the total value in provinces. Mr. Haaris will have to pay these costs in addition to the cost of the property he purchases from Mr. Waleed. The Stamp Duty is a tax paid on the beige legal documents used to document financial transactions. Now, let’s assume that Mr. Haaris bought a property worth PKR 600,000; he would pay a total property tax of PKR 30,000. Of this, PKR 12,000 would be CVT, and 18,000 would be SD. He will have to pay these taxes only one time during the purchase of the property.
Aside from this, both Mr. Haaris and Mr. Waleed will have to pay a Withholding Tax (WHT). A Withholding Tax is paid to the federal government of Pakistan, as opposed to the CVT and SD paid to the government of, say Punjab. The WHT is known as an ‘advance tax’ meaning that it takes precedence over other forms of taxes. It is only valid on properties worth PKR 4,000,000 or more. Let’s assume that Mr. Haaris buys a property worth PKR 4,000,000. He will have to pay a 2% WHT (PKR 80,000) if he is a tax filer and a 4% tax (PKR 160,000) if he is not a tax filer. Whereas Mr. Waleed will have to pay 1% of the total value (PKR 40,000), if he is a filer, and 2% (PKR 80,000) if he is not a filer. And finally, if Mr. Haaris pays his property tax on time, i.e. if he pays his taxes before the end of the fiscal year on 30 September, he will get a tax rebate of 5%, meaning that he will have to pay PKR 1500 less. And if he should fail to pay on time, he will receive a 1% penalty each month he misses his payment, meaning that every month he fails to pay his property tax, he will be fined PKR 300 per month.
Yes, Overseas Pakistanis Have to Pay Taxes
Overseas Pakistanis are, for the most part, not exempt from taxes, but the caveat is that any income earned inside Pakistan is tax-deductible. For example, if a Pakistani citizen living abroad is on the pay-roll of a company based in Pakistan and is drawing a regular salary, that salary will be taxed at the source. Any remittances earned abroad will not be taxed by the Pakistani government, on the condition that the individual is not a resident of Pakistan. Furthermore, any assets, both immovable and otherwise, purchased solely from foreign remittances, will not be taxed, contingent on the ability of the Pakistani expat’s ability to prove that all purchases were made through foreign earnings. The expatriate must also be able to certify that all transactions were conducted through legal channels allowed by the State Bank of Pakistan. Overseas Pakistanis can file their taxes online at the Federal Board of Revenue’s online portal. A Pakistani resident, on the other hand, will be liable to pay a tax if their foreign earned income exceeds $10,000 a year, or if they have foreign assets with a value of $100,000 or more.
Pakistan Tax Calculator
A property tax in Pakistan is incumbent on anyone who owns, is buying or selling a property in the country. When a seller sells any property in Pakistan, he/she has to pay something called the Capital Gains Tax. Simply put, a CGT is a tax paid on the profit earned after the sale of any property in Pakistan. The value of this tax depends on when the property is sold. If sold within the first year of acquisition, the tax will be 10% of the income. If sold in the second year, it will be 7.5%, and 5% if sold in the third year.
To streamline the taxation process, the Pakistani government has made paying taxes online a possibility. Now you can pay through your ATM card and no longer have to bear the agony of standing in long queues. The process is simple enough as well. First, you will get your tax slip online from the Federal Board of Revenue’s website, after filling your details in, then you will access your bank’s payment details through the slip and transfer the required funds to the designated government bank account. Similarly, calculating property taxes is very easy now thanks to the digitization of the system. One only needs to go to the website of the excise and taxation department and fill in the details. This is a Pakistan tax calculator, designed to make online property tax payment easy and streamlined.
To conclude, taxes are the life-blood of a nation and no nation can thrive without the contribution of its citizens. Pakistan has one of the lowest tax rates in the world and also one of the smallest tax bases. An FBR report, cited by Dawn news on September 6, 2019, Pakistan’s tax filers had grown by 783,039, however, citing the same report, Geo News reported that according to the FBR’s report, still only one percent of Pakistani’s pay taxes. Out of a nation of 220 million citizens, only 2.154 million pay taxes, 700,000 of who are salaried people. We should ask ourselves whether we can ever expect our nation to progress under the circumstances when so few of us want to contribute to its collective welfare.