Double Taxation in Pakistan’s Real Estate: A Deep Dive
Pakistan’s real estate sector, long considered a cornerstone of economic growth, is grappling with a contentious issue: double taxation. At the heart of the dispute lie conflicting interpretations of tax laws, particularly Sections 236C and 236K of the Income Tax Ordinance, 2001. Developers, led by the Association of Builders and Developers of Pakistan (ABAD), argue that overlapping levies at the allotment and transfer stages are stifling growth. Meanwhile, provincial authorities like the Punjab Board of Revenue (BOR) and Punjab Land Revenue Authority (PLRA) insist on strict compliance. Let’s unpack the debate, its implications, and what it means for buyers and investors.
Understanding the Double Taxation Dilemma
The term “Double Taxation in Pakistan’s Real Estate here refers to developers and housing societies being taxed twice on the same transaction:
- At the allotment stage (first sale of a plot or flat).
- During subsequent transfers (resale by the buyer).
Under Section 236K, tax applies to both allotments and transfers. However, Section 236C is meant to target transfers only. The confusion arises when provincial tax authorities apply Section 236C to the first sale, arguing that even allotments involve a “transfer of rights.”
Hassan Bakhshi, Chairman of ABAD, explains:
“Developers already pay taxes under Section 7-F on their business income. Charging them again under 236C at the registry stage is unfair. This isn’t just a Punjab issue—Sindh faces similar disputes.”
The stalemate has left thousands of property registries pending in Punjab, with developers refusing to comply and buyers caught in the crossfire.
ABAD’s Role in Advocating for Developers
The Association of Builders and Developers of Pakistan (ABAD) has emerged as the industry’s voice. Hassan Bakhshi highlights two core grievances:
- Delayed Refunds: Taxes paid under Section 7-F take up to a year to refund, straining liquidity.
- Legal Ambiguity: Provincial authorities’ interpretation of Section 236C contradicts federal guidelines.
ABAD argues that allotments (first sales) should be classified as business income taxable under Sections 18 and 36, not as capital gains. This distinction is critical because:
- Business income is taxed annually based on profits.
- Capital gains are taxed per transaction under withholding provisions like 236C.
“The law is clear: you can’t tax the same income under two heads,” says Bakhshi.
Sections 236C vs. 236K: Decoding the Legal Maze
To resolve the conflict, we must dissect the two provisions:
1. Section 236K
- Applies to both allotments and transfers.
- Requires developers to collect tax in installments from buyers during construction.
- First proviso: If tax is collected in installments, no additional tax is due at the time of registry.
2. Section 236C
- Targets transfers only (resale of property).
- Levies advance tax based on the property’s value.
The Punjab Board of Revenue (BOR) insists that any registry—even for first-time allotments—triggers Section 236C. Zaman Watto, Tax Member of Punjab BOR, defends this stance:
“Sub-registrars act as withholding agents. Whenever a registry occurs, 236C applies unless explicitly exempted.”
Critics argue this interpretation ignores SRO 1376(I)/2024, which clarifies that allotments are distinct from transfers.
Punjab BOR and PLRA: Sticking to Their Guns
The Punjab Land Revenue Authority (PLRA) and BOR have doubled down on enforcing Section 236C since late 2024. Their rationale:
- Registries legally transfer ownership, even for first-time buyers.
- Developers must act as withholding agents, deducting tax before processing registries.
However, this creates a paradox:
- Developers cannot be both withholding agents and withholdees under the same transaction.
- The Federal Board of Revenue’s (FBR) IRIS system technically blocks this scenario, implying allotments fall outside 236C’s scope.
Sardar Tahir Mehmood, a developer and member of the PM’s Task Force on Real Estate, notes:
“For decades, first registries weren’t taxed under 236C. This new enforcement is arbitrary and harmful.
FBR’s Balancing Act
The Federal Board of Revenue (FBR) walks a tightrope. While acknowledging the industry’s concerns, spokesperson Dr. Najeeb Ahmed states:
“The ordinance’s wording is clear, but interpretations vary. We’ll review the policy in the next budget.”
Key FBR positions:
- Section 7-E Exemption: Properties held by developers for business are exempt from asset tax.
- SRO 1376(I)/2024 explicitly excludes allotments from 236C if taxes are paid in installments.
Despite this, the FBR has deferred to courts for final interpretation, leaving developers in limbo.
Liquidity Crisis: The Ripple Effect
The liquidity crisis in Pakistan’s real estate is worsening due to:
- Pending Registries: Buyers delay payments until registries clear.
- Trapped Capital: Developers’ refunds are stuck in bureaucratic delays.
- Reduced Investment: Uncertainty deters domestic and foreign investors.
A Lahore-based developer shares
“We’ve halted new projects. Without clarity, banks won’t lend, and buyers won’t commit.”
SRO 1376(I)/2024: A Ray of Hope?
Issued in September 2024, this SRO aimed to clarify ambiguities:
- Allotments = First Sale: Taxable under business income provisions.
- Transfers = Subsequent Sales: Taxable under 236C/236K.
Yet, Punjab BOR continues to disregard it, citing provincial autonomy over land revenue.
The Way Forward: Recommendations
To resolve the impasse:
- Harmonize Federal and Provincial Laws: Align interpretations of 236C/236K.
- Expedite Refunds: Clear developers’ pending claims within 90 days.
- Public awareness: educate buyers on tax liabilities at each transaction stage.
People also ask
Q: How does double taxation affect homebuyers?
A: Higher costs for developers lead to inflated property prices.
Q: Are exemptions available under 236C?
A: Yes—for dependents of martyrs, armed forces personnel, and government employees.
Q: Can developers challenge Punjab BOR’s stance?
A: Multiple cases are pending in courts, but rulings may take years.
- What is the core issue causing a stalemate in property registries in Punjab and Sindh?
- Dispute over the applicability of Section 236C on housing societies and developers during the first sale/allotment stage.
- How does Section 236C differ from Section 236K of the Income Tax Ordinance?
- 236K applies to both transfer and allotment, while 236C applies only to transfers (not first sales).
- Why does the real estate industry claim “double taxation”?
- Developers already pay taxes under Section 7-F but face additional withholding tax under 236C during first registries.
- What is the Punjab Board of Revenue’s justification for applying Section 236C to allotments?
- They argue that any registry (even first sale) triggers 236C, as sub-registrars act as withholding agents.
- How does the industry counter the Punjab tax authorities’ interpretation?
- Allotments are “first sales” (business income under Sections 18/36), while 236C targets subsequent transfers (capital gains).
- What legal provisions or SROs support the industry’s stance?
- SRO 1376(I)/2024 clarifies that allotment is a first sale, exempting developers from 236C.
- What systemic issue arises with housing societies as withholding agents?
- IRIS system disallows withholding agents and withholdees to be the same entity, implying 236C doesn’t apply to allotments.
- What is the FBR’s official stance on the dispute?
- Acknowledges the issue is under legal review but suggests clarity in the ordinance and potential budget reforms.
- What are the practical consequences of this taxation dispute?
- Delayed refunds, liquidity crises, and stalled property registries.
- Are there exemptions to Section 236C?
- Yes: Dependents of martyrs, armed forces personnel, and government employees are exempt.
- How does the distinction between “business income” and “capital gains” affect taxation?
- Allotments (business income) are taxed differently from resales (capital gains), preventing overlap with 236C.
- What historical context explains the recent enforcement of 236C on allotments?
- Punjab authorities began applying it 3–4 months prior, diverging from past practices.
- What future steps are proposed to resolve the issue?
- FBR may review the policy in the next budget, pending court interpretation.
