To overcome the administrative problems being faced in collection of CGT on disposal of immovable property and to keep a track of the transactions of immovable property adjustable advance withholding tax @ 0.5% of the consideration received on sale/transfer of immovable property was levied on sellers/transferors of immovable property under section 236C of the Income Tax Ordinance, 2001.
The FBR has clarified that the advance tax to be collected under section 236C has been introduced for the purpose of providing a mechanism for collection of capital gain tax on disposal of immovable property. The actual quantum of capital gain and tax payable thereon is to be computed at the time of filing of income return. Section 236C is not an independent provision and does not operate in isolation. Since Capital Gain Tax has been imposed only on disposal of properties held for a period of up to two years therefore, advance tax is also to be collected from sellers who held the immovable properties for a period up to two years.
Prior to the 18th Constitutional Amendment effective from 19th April, 2010 Entry 50 of the Federal Legislative List contained in Part-I of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan empowered the Federal Legislature to levy taxes on the capital value of the assets, not including taxes on capital gains on immovable property. The words "on capital gains" were omitted by the 18th Constitutional Amendment. The effect of omission of these words is that the Federal Legislature cannot impose taxes on capital value of immovable property but can levy tax on capital gains on disposal of immovable property, FBR maintained.
In view of the modified constitutional position exemption to capital gains on the disposal of immovable property held for a period up to two years was withdrawn by making amendments in section 37 of the Income Tax Ordinance, 2001 through the Finance Act, 2012. Simultaneously, a new Division was added in the First Schedule to the Income Tax Ordinance, 2001 giving the following rates of tax to be paid on capital gains from disposal of immovable property:
S.No Period Rate of Tax
1. Where holding period of Immovable 10%
property is up to one year.
2. Where holding period of Immovable 5%
property is more than one year but not
more than two years.