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Tax on gain on immovable property

Who is violating the Constitution?

Huzaima Bukhari & Dr. Ikramul Haq

The unanimously-passed 18th Constitutional Amendment, received assent of President on April 19, 2010, was undoubtedly a titanic exercise aimed at securing consensus through parliamentary negotiations between divergent, conflicting and competing interests within the federation of Pakistan. Through this Amendment, 102 out of 280 Articles of the Constitution were amended without a single dissenting vote in both of the Houses. This virtually created a new federation through radical reforms in various spheres of governance, sharing of powers between the Centre and the provinces, fiscal and administrative domains.

The deletion of Concurrent List and various entries in the Federal Legislative List in the18th Constitutional Amendment has given new avenues to the provinces for raising revenues to meet their needs and spend more money for social services. It is, however, sad to note that even after four years, the provinces have not realised the importance of these changes. All the provinces have failed to expand tax base. There is no political will to collect taxes from the rich and mighty by imposing progressive taxes like estate duty and tax on gain of immovable property. The power to levy duties in respect of succession to property and estate duty in respect of property under items 45 and 46 of the Federal Legislative respectively, before omission by the 18th Constitutional Amendment, was with the Federal government. Now it exclusively lies with the provinces by virtue of Article 142(c) of the Constitution.

While the provinces are not levying and/or collecting progressive taxes, including agricultural income tax from the rich absentee landlords, the federal government unlawfully levied income tax on gain of immovable property vide Finance Act 2010 on the basis of misreading the amended position of Entry 50 of the Federal Legislative List after the 18th Constitutional Amendment. Provinces have yet not contested unlawful act of the federal government. The right to tax gain on immovable property situated within their territories is still with the provinces. The government of Punjab rightly levied the same through section 9 of Finance Act 2013 that reads as under:

“Capital gains tax on immovable property.– (1) This section shall have effect notwithstanding anything contained in any other law.

      (2)  For purposes of this section–

            (a)  “acquisition” means transfer of property through any mode including gift, bequest, will, succession, inheritance, devolution, dissolution of an association of persons or, winding up or liquidation of a company;

            (b)  “Board of Revenue” means the Board of Revenue established under the Punjab Board of Revenue Act, 1957 (XI of 1957);

            (c)  “Collector” means the Collector of the district appointed under the Punjab Land Revenue Act, 1967 (XVII of 1967) and includes the Collector of a subdivision or any other officer specially empowered by the Board of Revenue to exercise and perform the functions of the Collector;

            (d) “Government” means Government of the Punjab;

            (e)  “person” includes–

                      (i)   an individual;

                     (ii)   an association of persons;

                    (iii)   a company;

                    (iv)   a body corporate;

                     (v)   a foreign government;

                    (vi)   a political subdivision of a foreign government; and

                   (vii)   a public international organization;

            (f)  “recorded value” means the value declared by the transferor in the instrument, provided that the declared value of the property shall not be less than the value specified in the valuation table notified by the Collector of the district; and

            (g)  “tax” means capital gains tax on sale of an immovable property and includes any penalty, fee and charge or any sum or amount leviable or payable under this section.

      (3)  A gain occurring from the sale of immovable property by a person in a tax year shall be chargeable to tax in that year at the following rate:-

Sr. No.DescriptionRate
1.Sale within one year of acquisition5% of the capital gain or 2% of the recorded value at the time of sale, whichever is higher
2.Sale between more than one but within two years of acquisition4% of capital gain
3.Sale between more than two but within three years of acquisition3% of capital gain
4.Sale between more than three but within four years of acquisition2% of capital gain
5.Sale between more than four but within five years of acquisition1% of capital gain
6.Sale after five years of acquisitionNo tax.

(4)  The Collector shall determine the capital gain through calculating difference in valuation at the time of acquisition and sale on the basis of valuation table notified by the Collector of the district under section 27-A of the Stamp Act, 1899 (II of 1899) or the recorded value in the transfer deed, whichever is higher.

      (5)  The Collector shall assess and collect the tax, and for this purpose, may exercise any power of the Collector under section 6 of the Punjab Finance Act 2010 (VI of 2010).

      (6)  For purposes of appeal, review or revision, an order passed under this section shall be deemed to be an order of a Revenue Officer within the meanings of sections 161, 162, 163 and 164 of the Punjab Land Revenue Act 1967 (XVII of 1967).

      (7)  Where the tax has been recovered from a person not liable to pay the same or in excess of the amount actually payable, an application may, in writing, be made to the Collector for the refund of the tax or the excess amount within one year of the payment of the tax.

      (8)  The Board of Revenue may, by notification in the official Gazette, make provisions relating to the collection and recovery of the tax or for ancillary matters.

      (9) The Government may, by notification in the official Gazette, exempt a class of immovable property or a class of persons from the levy or recovery of the tax subject to such conditions as may be specified in the notification”.

In 2010, the Revenue Advisory Council (RAC) of FBR recommended imposition of Capital Gains Tax (CGT) on the sale of immoveable property. It was claimed that FBR obtained “favourable” opinion from the Law & Justice Division of Ministry of Law, Justice and Parliamentary Affairs that after the 18th Constitutional Amendment, the Federal Government was entitled to levy CGT on the sale of immoveable property. In the light of recommendation of Law & Justice Division of Ministry of Law, Justice and Parliamentary Affairs, RAC asked the FBR to propose to the government methodology of the imposition of CGT on immovable property. In the past, a group working on tax reforms proposed to the government to impose 10 percent CGT on the sale of immoveable property after excluding impact of inflation, depreciation of rupee and actual price paid on the purchase from the present market price. FBR was of the view that the real issue in the imposition of CGT was not constitutional bar after 18thConstitutional Amendment, but the correct valuation of immoveable properties as sellers and buyers conceal the actual payment—in majority of the cases, sale deeds were three times lower than the fair market value of actual transaction.

Prior to the amendment in Entry 50 of the Federal Legislative List of Fourth Schedule to the 1973 Constitution through 18thConstitutional Amendment, the National Assembly had no power to levy capital gain tax on disposal of immovable property. But after the 18th Amendment in Constitution, on the wrong advice of Law Ministry and FBR, the same was levied by deleting clause (c) of subsection 5 of section 37 of the Income Tax Ordinance, 2001 through the Finance Act 2012.

Entry 50 of the Federal Legislative List, as amended by the 18thConstitutional Amendment, reads as under:

“50. Taxes on the capital value of the assets, not including taxes on immovable property”.

Prior to the amendment, the language of Entry 50 of the Federal Legislative List was:

“50. Taxes on the capital value of the assets, not including taxes on capital gains on immovable property”.

In the light of omission of words “capital gain”, FBR sought the opinion of Law & Justice Division about its scope and import. According to FBR, the Law & Justice Division endorsed its point of view that after amendment in Entry 50 of Federal Legislative List through the 18th Constitutional Amendment Act of 2010, the levy of tax on capital gain on the disposal of immovable property had become federal subject and now National Parliament could legislate on it.

Historically, gain on disposal of immovable property fell outside the ambit of Income Tax Ordinance, 2001. Section 37(5)(c) of the Income Tax Ordinance, 2001 before amendment provided that “capital asset does not include any immovable property”. However, after misinterpretation of amended Entry 50 of the Federal Legislative List by Law & Justice Division, the Finance Act 2012 removed these words to bring gain on disposal of immovable property, including agricultural lands, within the ambit of income tax.

Income Tax Ordinance, 2001 also through Finance Act 2012 inserted a new section 236C for collection of tax from the seller at the time of transfer of property at the rates provided in the First Schedule. It was explained by FBR in Circular No. 2 of 2012 as under:

“To overcome the administrative problems in respect of collection of CGT on disposal of immoveable property and to keep a track of the transactions of immoveable property adjustable advance withholding tax @ 0.5% of the consideration received on sale/transfer of immoveable property was levied on sellers/transferors of immoveable property under section 236C of the Income Tax Ordinance, 2001.

It is clarified that the advance tax to be collected under section 236C has been introduced for the purposes of providing a mechanism for collection of capital gain tax on disposal of immoveable property. The actual quantum of capital gain and tax payable thereon is to be computed at the time of filing of return of income. 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 up to two years therefore, advance tax is also to be collected from sellers who held the immoveable properties for a period up to two years”

 FBR in 2012, at the time of imposition of capital gain tax on disposal of immovable property said “it would help in broadening of tax base and substantially enhance revenue. It would play a major role in plugging one of the loopholes for whitening untaxed money in the name of capital gain. The imposition of the CGT on immovable property is in line with the principle that every income is taxable unless specifically exempted. It would also bring stability in the prices of immovable property conveying healthy message to the masses”. None of these goals was achieved since the imposition of CGT by FBR as official figures confirm that collection was miserably low.  Now the same tax has been levied by Punjab from July 1, 2013. It is obvious that either the federal government or the Punjab government has committed violation of Entry 50 of the Constitution. Interestingly nobody has yet noticed this anomaly till today.

As discussed above, Law & Justice Division misinterpreted the amendment in Entry 50 of the Federal Legislative List through 18th Constitutional Amendment. Entry 50 clearly debars the federal government from levying any kind of tax on immovable property. The Law Ministry and FBR did not realise that even Capital Value Tax (CVT) was transferred to provinces in the wake of 18th Constitutional Amendment. If federal government cannot levy any tax on immovable property, how can it tax “capital gain” arising out of immovable property? This simple proposition was ignored both by Law Ministry and FBR. 

It is worthwhile to mention that the erstwhile Wealth Tax Act, 1963, levied under Entry 50 of the Federal Legislative List, was challenged under Article 199 of the Constitution. The matter went up to the Supreme Court. In its decision reported as Haji Mohammad Shafi and Others v Wealth tax Officers and Others 1992 PTD 726, the Supreme Court held that Parliament under Entry 50 of Federal Legislative List was competent to levy wealth tax on the value of assets. It was held that the manner in which valuation of any immovable asset was made could not be termed as “tax on capital gain”. Before the amendment in Entry 50 of Federal Legislative List by the 18th Constitutional amendment, the federal government was barred from taxing “capital gain on immovable asset.” Now this bar has been extended to “taxes on immovable property”.

One wonders how FBR and Law & Justice Division by just omission of words “capital gains” in Entry 50 of the Federal Legislative List concluded that right to taxation was shifted to federal government. They failed to see that second part of Entry 50 is couched in negative phrase.

After the imposition of tax on gain of immovable property by Punjab in 2013, FBR and Law Division are required to revisit their opinion and read the law in its proper context and in the light of judgement of Supreme Court in Haji Mohammad Shafi and Others v Wealth tax Officers and Others 1992 PTD 726. The phrase “not including taxes on immovable property” in Entry 50 cannot be read to “include taxes on capital gains on immovable property”. Plain reading of Entry 50 of Federal Legislative List, as it stands now, confirms that the National Parliament can levy taxes on capital value of moveable assets but has no authority to levy taxes, including capital gain tax, on immovable property. It is obvious that taxes include tax on capital gains.

The way FBR and Law & Justice Division have read plain language of Entry 50 of Federal Legislative List speaks volumes about their level of competence. But it is strange that parliamentarians sitting in National Assembly have also failed to read the supreme law of the land correctly and committed a blatant violation while levying income tax on gain arising out of disposal of immovable property.

The Punjab Assembly has correctly read Entry 50 of Federal Legislative List and levied tax on gain of immovable property in 2013. If the federal government is of the view that its interpretation of Entry 50 of Federal Legislative List is correct it should refer the matter to the Supreme Court under Article 184(1) of the Constitution that has exclusive jurisdiction in any dispute between any two or more Governments.


The writers, tax lawyers and Visiting Faculty at Lahore University of Management Sciences (LUMS), are partners in Huzaima & Ikram Taxand Pakistan).

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