Learn About Property Taxes in Pakistan
Property taxation in Pakistan is a confusing subject. While sales tax on immovable property transactions is relatively easy to comprehend, federal and provincial governments levied different taxes on movable properties like cars or machinery over time. The following article explains how taxes are applied to both movable and immovable property in simple terms.
Taxes on Immovable Properties Taxpayers for this type of tax are individuals who own houses, lands, farms, etc. The rate can never exceed more than 1% of market value (the government has tried to levy higher rates twice in the past but met with strong resistance both times). There are two types of immovable properties: (1) Agricultural (2) Non-agricultural. For taxation, both are further divided into three categories; 1. Land 2. Buildings 3. Plant & Machinery The following taxes are paid on immovable properties:
(1) Stamp Duty:
‘Sher’ in local terminology is a provincial subject under the constitution of Pakistan. It’s collected by Provincial governments through their revenue department and deposited to their treasury after retaining an amount for administrative costs. Even though Municipal Committees have been empowered recently by the government to register property transactions, it does not have authority to charge stamp duty or administer this tax due to its non-revenue generating nature.
(2) Capital Gains Tax:
This tax is levied when a piece of land or building changes hands. It also has different rates in different provinces and may vary depending on the original cost of the asset, its age, etc. There are very few countries around the world where this tax exists. It makes Pakistan one of the most challenging places to liquidate an existing asset and buy something new.
(3) Property Tax:
After much resistance from citizens, a relatively new tax in Pakistan was introduced during the Musharraf rule in 2007-08. Previously all property transactions were exempt from any taxation, but today’s law levies 1% tax only on immovable properties having an annual rental value above Rs 100,000 (US$ 1000). It’s worth mentioning here that the province of Sindh has refused to levy this tax at all (most likely because it is governed by PML-N, which is against any taxes).
(4) Wealth Tax:
It applies to individuals who own assets above standard exemption limits. The current limit is Rs 1 million for both agricultural and non-agricultural properties combined. While initially, this tax was introduced with much resistance, especially from the business community. It now exists in almost all provinces except Punjab, where the PML-N Government is against it.
(5) Others Taxes:
Other taxes like education tax, entertainment duty, etc., apply only to specific groups or professions, so we do not include them here.
Taxes on Movable Properties (Property Taxes in the USA):
Taxpayers for this type of tax are individuals who own movable properties like cars or machinery. The rate varies provincially but can never exceed more than 1% of market value. There are three types of immovable properties: (1) Agricultural (2) Non-agricultural (3) Commercial. For taxation, all three are further divided into two categories; 1. Vehicles 2. Machinery & Equipment only the first category, including cars and other motorized vehicles, is discussed below. In contrast, the second category is excluded due to its complexity and difficulty in terms of valuation.
This tax is taken by the Federal Government and then given to provinces after retaining administrative costs. As already mentioned, there are four types of GST/HST in Canada (federal, provincial, territorial, and harmonized), but here we’ll discuss only two which apply to the purchase of cars;
(1) GST at 5% applies on the purchase of new cars while
(2) PST at both the Federal and Provincial level apply to use cars depending upon age.
For example, if a car were registered before April 1st, 2005, the rate would be 5%, while if it were registered after that date, the rate would be 8%. Pakistan’s sales tax or ‘Secondary Tax’ applied by FBR is almost the same as Canada’s GST.
Excise Tax: This tax is levied on the manufacturing of a product which eventually gets transferred to the consumer, i.e., it’s paid by manufacturers and recovered from customers during the sale transaction. The Federal Government uses this money for development purposes while provinces spend it in their respective jurisdictions. In Canada, certain products are exempted from excise tax, like electricity or gas. Still, in Pakistan, all kinds of goods and services are subject to this tax regardless of whether they’re necessities or luxurious.
Luxury Tax/Sin Tax: This kind of taxation is not very common around the world. Still, it has been applied recently by some countries, including Pakistan, where Federal Government has introduced more than 50 different luxury goods/services, which attract a tax ranging from 10% to 35%. The motive behind this type of tax is apparent; discourage luxurious consumption and encourage people to save. Most of these taxes are either applied as a percentage based or as a fixed amount for each quantum of taxable services/goods.
Property Taxes in Canada and Pakistan both Systems follow the same philosophy, i.e., taxpayers should be taxed low but based on ability to pay (ability to afford), and higher-income earners should bear a more significant burden than less affluent ones, however despite its simplicity still there are too many loopholes like ‘tax planning’ and ‘tax avoidance’ which need legal reforms if we want our taxation system help to develop and prosper our economy rather than widening social and economic disparity in the society.
People generally think that taxation is a modern phenomenon, and it was introduced in the twentieth century when WWI & WWII compelled governments to impose new taxes on ordinary citizens. However, this myth can be busted by studying Vedic (Hindu) texts like Vedas, Upanishads, etc., which were written before 1000 BC and contains hundreds of hymns dedicated exclusively to ‘Rta’ or tax. According to these texts, God created human beings with a purpose to sustain earth’s ecology, and humans should play their part in maintaining balance by paying taxes (dharmic tax) and similarly kingdoms should also contribute this way because the earth belongs equally to all its inhabitants regardless of their caste, creed or race.
The Ancient world was divided into three types of economies;
Command Economy aka Absolute Monarchies. It is an economy where King is the sole owner of all-natural resources. He alone decides how to utilize these resources for the nation’s development, which means increased military power in most cases. One clear example of this type of system can be illustrated by the story of Mahabharat when Pandavas were asked to construct a Palace overnight with the help of elephants, jewels, etc. While on the other hand, Kauravas used the same resources to increase their military might, i.e., they set up a gambling match with Yudhisthir instead! These types of economic systems are very rare today but existed widely in ancient times.
Private Property aka Feudal Economies. In this economic system, people were allowed to retain control over their property and resources as long as they paid a certain amount of produce or labor to the monarch at regular intervals. This system was introduced after the collapse of command economies because it required a well-educated civil administration to maintain records for land survey, revenue collection, etc. However, due to illiteracy and ignorance about its advantages, this system couldn’t survive more than a few centuries, making way for the economy’s third form.
Capitalist System aka Free Market Economy. There is no king in this type of economy, but rather laws are made by elected representatives who other elected officials can replace if they fail to deliver. Unlike Command Economic, where only one person decides about the use of resources, all citizens can participate in decision-making in this type of economy because everything is decided through a vote. In Free Market models, there are few restrictions but still much more than the command model. However, it also has a loophole, i.e., all individuals may not have the same financial capabilities to exercise their voting rights. They should be given some representation due to their indispensability as a source of tax revenue or service provider, etc.
In essence, the taxation system is based on the theory that those who benefit from government services/infrastructure & can pay the same proportion for its development, and those who don’t can be forced to contribute because they are either unable or unwilling. To do so! This philosophy was applied by Roman Empire when they developed a sophisticated road network because only those who could afford to pay were allowed to use these roads. Similarly, modern countries like India, Pakistan & United States follow the same philosophy by imposing taxes on fuel, income, etc., so that it can be used for the nation’s development, which is also the basic argument of every taxpayer.
Currently, taxation levels in Pakistan are too high, which isn’t fair because poor people remain deprived, whereas corrupt elements may be paying nothing at all! There should be any level playing field where rich & poor contribute proportionately based on their earning capacity. Still, our system is corrupted because many large companies like Nestle, Engro Foods, or Ibrahim Group may not even come under tax radar while small keepers are taxed excessively. Pakistan Revenue Automation Ltd (PRAL) has estimated over 5 million companies in Pakistan, but less than 100,000 pay taxes, so where is the remaining 95% money coming from? Taxes should be increased on all non-filers. Amnesty schemes should target giant fish, i.e., those with hundreds of millions or billions in their accounts abroad! After getting amnesty, they may continue contributing to the national exchequer by paying taxes regularly. We can proudly say that we have the highest taxpayer nation with the political will to check corruption!
Pakistan’s taxation system is also faulty because mill rates vary from one area to another, making it extremely difficult for someone who wants to buy a piece of land in Karachi after having a villa in Lahore! The local government must be stopped from setting tax rates for capital gains, stamp duty, real estate registration fees & vehicle tax. It is the central government’s job to collect revenue for public welfare projects, not local bodies! It should fix one rate, but these funds remain with provincial or federal governments, which only increase their discretionary spending on new cars or weapons!
Pakistan needs to stop giving tax exemptions to the elite class and focus on increasing taxation on all those who can afford it. A new inheritance law should also be introduced, which doesn’t allow anyone who owns more than two villas or 10 acres of agricultural land to transfer unearned wealth, i.e., their salary or pension, to their legal heirs! If inheritance transfer is allowed, it should be taxed accordingly to discourage this practice because the accumulation of unearned income in a few hands creates an unfair rich-poor gap that must be controlled through the taxation system. Currently, there is no tax on inheritance transfers, and it should be implemented to make the system less discriminatory
Pakistan’s taxation system has many loopholes, over 200 different types of taxes are being collected, but still, the country lacks necessities like electricity, clean drinking water, sanitation, etc. For instance, there is no tax on inheritance transfers, and if someone dies with 10 million rupees, he can easily pass it on to heirs without paying any tax! It is the root cause of the widening rich-poor gap; tax rates must be increased at Federal, provincial & local levels to widen the tax net and increase state revenues, which can provide fundamental rights!