Finance Bill 2024 unveils changes to the capital gains tax system

The recently introduced Finance Bill 2024 brings significant changes to Pakistan’s capital gains tax regime, which will be applicable from July 1, 2024. Let’s take a look at the key updates for both individuals and companies.

Capital gains on real estate (real estate)

• The capital gains tax on real estate, introduced in 2012, was previously linked to the ownership period of the real estate. Rates ranged from 2.5% to 15% with separate classifications for open plots, building properties and apartments. Properties held above a certain threshold enjoyed a zero-rated capital gain when sold.

• The new regime proposes a flat rate of 15% for all real estate acquired on or after July 1, 2024, regardless of the holding period or the type of real estate. This applies to persons and Associations of Persons (AOPs) whose names appear on the List of Active Taxpayers (ATL) on the date of the divestment.

• For those not covered by the ATL, capital gains are taxed at applicable income tax rates, subject to a minimum of 15%. Non-ATL corporations are taxed at the applicable corporate tax rate.

• The previous system of holding periods and classifications remains unchanged for properties acquired before July 1, 2024.

• A new concept of “late filers” is introduced. Individuals on the ATL who file their tax returns after the due date will face higher tax rates on real estate transactions.

Capital gains on listed securities (shares)

• The capital gains tax on listed shares, introduced in 2010, initially offered a zero rate for securities acquired before July 1, 2013. Later, a 12.5% ​​rate was applied to securities acquired between July 1, 2013 and June 30, 2022. Period-based rates have since been introduced. in force, with a maximum of 15% and a rate of 0% for holdings of more than six years.

• The new regime proposes a flat rate of 15% for all capital gains on listed securities acquired on or after July 1, 2024, regardless of the holding period. This applies to individuals and AOPs on the ATL on both the acquisition and disposal dates.

• Individuals and AOPs not covered by the ATL on either date will be taxed at applicable income tax rates, subject to a minimum of 15%. Non-ATL corporations are taxed at the applicable corporate tax rate.

• The previous holding period system remains unchanged for securities acquired before July 1, 2024.

Capital gains on mutual funds and REITs

• The government proposes to increase the withholding tax rate on capital gains from equity funds if dividend income is lower than capital gains. The existing rate of 12.5% ​​will increase to 20%.

• The current capital gains tax exemption for holding investment funds for more than six years will be limited to acquisitions before July 1, 2024.

• The tax rate and withholding tax on dividends from investment funds that earn 50% or more of their income from “gains on debt” will be increased to 25%, up from the current 15%.

Shares of unlisted companies

• Introduced in February 2023, there is a withholding tax of 10% on the fair market value of unlisted shares at the time of payment. The tax must be deposited within 15 days.

• The scope of this provision has been extended to include shares of listed companies traded outside the National Clearing Company of Pakistan Limited (NCCPL) mechanism and through the Initial Public Offer (IPO) process, except when details are submitted to NCCPL for tax payment .

• For shares registered with the State Bank of Pakistan (non-residents on repatriation basis), the seller must now provide a tax payment certificate before registration or transfer of registration.

• The advance income tax will now be applicable at the earliest time of payment or registration of shares by the Securities and Exchange Commission of Pakistan (SECP) or SBP. Non-compliance will result in a penalty of 50% of the tax amount.

Overall impact

The revised capital gains tax regime aims to simplify the system and potentially increase tax revenues. However, it also brings complexities, especially for those who do not participate in the ATL and for transactions involving unlisted shares. Companies and investors will have to adapt their strategies to comply with the new regulations.

Key learning points

• A flat rate of 15% will be introduced for capital gains on property acquired after 1 July 2024, for individuals and AOPs on the ATL.

• A flat rate of 15% will be introduced for capital gains