Taxation of Real Estate Businesses in Pakistan

The real estate sector in Pakistan is one of the largest contributors to the national economy, attracting both domestic and overseas investment. However, due to its vast informal structure, it has also remained under scrutiny by tax authorities. Over the past few years, the Federal Board of Revenue (FBR) has introduced several reforms aimed at enhancing documentation, expanding the tax base, and ensuring that real estate transactions reflect actual market values. This article provides a comprehensive guide to the taxation of real estate businesses in Pakistan, including applicable taxes, compliance requirements, tax planning opportunities, and recent regulatory changes.

Types of Real Estate Businesses in Pakistan
Real estate businesses operate in various forms, including:

• Real estate development companies

• Builders and contractors

• Housing societies and developers

• Real estate agencies (brokers and agents)

• Property investment holding companies

• REITs (Real Estate Investment Trusts)

Each of these entities may face different tax treatments depending on their legal structure, transaction type, and nature of income.

Applicable Tax Laws and Regulatory Bodies
The main tax and regulatory framework applicable to real estate includes:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Federal Excise Act, 2005

• Punjab Revenue Authority (PRA) and other provincial revenue authorities

• FBR Valuation Tables

• Real Estate Regulatory Authority (RERA) (under development)

• Capital Gains Tax (CGT) Rules

• Section 100D – Special Regime for Builders and Developers (expired in 2023, may be revised)

Legal Structures and Taxability
Real estate businesses can be operated as:

• Individual/Proprietorships: Taxed as individuals under normal slab rates

• Associations of Persons (AOPs): Taxed at flat 29%

• Private Limited Companies: Taxed at 29%

• REIT Schemes: Enjoy special tax treatment and exemptions under Section 100E

Income Tax on Real Estate Businesses
Income derived by real estate businesses may be taxed under the following heads:

1. Business Income:
For developers, construction companies, and real estate agencies, income from selling plots, homes, or receiving commissions is treated as business income, taxable at:

• 29% for companies and AOPs

• As per slab rates for individuals

2. Capital Gains:
Profit on the sale of property is taxed as Capital Gains if the asset is held for investment rather than regular business operations.

Capital Gains Tax (CGT) on disposal of immovable property for Tax Year 2024–25:

• Held up to 1 year: 15%

• 1 to 2 years: 12.5%

• 2 to 3 years: 10%

• 3 to 4 years: 7.5%

• 4 to 5 years: 5%

• More than 6 years: 0%

Note: For plots, CGT may apply for up to 6 years; for constructed property, the holding period is 4 years.

3. Rental Income:
If the real estate business owns rental property, rent is taxed under Section 15:

• 15% to 25% on net rental income after allowable deductions

• Companies can claim full deductions as per Section 20 (depreciation, insurance, repair, etc.)

Advance Tax on Property Transactions
The FBR collects advance tax at the time of sale or purchase of property:

On Buyers (Section 236K):

• 1% for filers

• 2% for non-filers

• 3% for commercial/industrial property (non-filers)

On Sellers (Section 236C):

• 3% for filers

• 6% for non-filers

This tax is adjustable against the final tax liability in the income tax return.

Valuation of Property – DC Rate vs FBR Rate vs Market Value
To reduce underreporting, FBR has published valuation tables for major cities. Property transactions must be reported at:

• FBR notified value, or

• Declared/market value, whichever is higher

Provincial governments may still use District Collector (DC) rates for stamp duty and registration fee calculations, but FBR valuation is binding for income tax purposes.

Withholding Tax Obligations for Real Estate Companies
Registered companies and developers must withhold tax under various heads:

• Section 153: 4% on payments to contractors

• Section 149: Income tax on salaries

• Section 155: Withholding on rent payments

• Section 194A: On dividend income (if applicable)

• Monthly withholding statements (Form 165) must be filed

Sales Tax and FED on Real Estate Services

• Construction Services: Subject to sales tax on services under PRA/Sindh Revenue Board (SRB), typically at 5% or 16%

• Real Estate Agents: Brokerage services are also taxed under provincial laws

• FED may apply in specific cases such as premium services or club memberships

REITs – A Tax-Advantaged Real Estate Structure
Real Estate Investment Trusts (REITs) enjoy favorable tax treatment:

• Exempt from tax if 90% of income distributed to unit holders

• Investors receive dividends with reduced tax withholding

• Encouraged under Section 100E of the Income Tax Ordinance

• Minimum capital requirements: PKR 500 million

• Must be regulated by SECP and listed on stock exchange

Special Tax Regimes for Builders and Developers
Previously, the government introduced a Fixed Tax Regime (FTR) under Section 100D for construction companies during 2020–2023:

• PKR 210 per square foot for builders

• PKR 125 per square yard for developers

• Project registration with FBR’s IRIS portal and submission of Project Profile was mandatory

• Tax paid under this regime was final discharge of liability

Note: This scheme expired in December 2023, but a revised version may be reintroduced in future finance acts.

Exemptions and Tax Benefits
Certain exemptions and incentives are available to promote real estate documentation and construction:

• Construction sector package

• Naya Pakistan Housing Scheme: Lower tax on affordable housing

• Exemption on capital gains if house is sold after 4 years

• First-time buyers may be exempt from advance tax

• Withholding exemption certificates under Section 159 may be obtained by REITs and registered developers

Documentation and Compliance Requirements
To avoid scrutiny and ensure compliance, real estate businesses must:

• Maintain proper accounting records

• Issue CNIC-based invoices for each transaction

• Reconcile property value with FBR tables

• File monthly sales tax and withholding statements

• Submit annual income tax returns and audited accounts

• Register each project if required under SECP or RERA

Tax Risks and Common Pitfalls
Real estate businesses often face the following risks:

• Misreporting sale/purchase values below FBR valuation

• Failing to deduct/withhold tax from contractors

• Undocumented transactions with cash

• Treating investment property as business stock (or vice versa)

• Ignoring advance tax deductions in property transfer

Audit and Monitoring by FBR
FBR and provincial authorities conduct random and risk-based audits to detect:

• Underreporting of gains

• Benami transactions

• Unjustified deductions

• Use of black money in asset purchase

Companies must prepare for audits by maintaining complete transaction records and working papers.

Tax Planning Strategies for Real Estate Businesses

• Use REIT structure to benefit from tax exemptions

• Plan capital gains by considering holding period

• Take benefit of deductions under Section 20 and depreciation under Third Schedule

• Split project timelines to defer tax liabilities

• Regularize previous unreported income under asset declaration schemes (when available)

Tax Implications for Overseas Pakistani Investors
Non-resident Pakistanis investing in real estate:

• Must file income tax returns if they earn rental income or sell property

• Are subject to capital gains tax and withholding taxes

• Can benefit from DTAA to avoid double taxation

• May require NTN registration to claim refunds and adjust taxes

Future Outlook and Reforms
The government has proposed key reforms:

• Development of a centralized Property Tax Portal

• Integration of NADRA, land records, and FBR

• Implementation of RERA for real estate regulation

• Digitization of land ownership and valuation system

• Introduction of automated withholding and transaction tracking

Conclusion
Taxation of real estate businesses in Pakistan is evolving rapidly, with a focus on transparency, fair valuation, and formalization of the sector. Registered developers, agents, and investors must stay updated with tax laws and proactively plan to minimize exposure while maximizing compliance. Whether you’re a construction company, real estate agent, or property investor, understanding your tax obligations is critical to long-term profitability and legal stability.