Property transactions in Pakistan have long been a cornerstone of investment, but recent regulatory changes demand heightened awareness to avoid costly pitfalls. At the heart of these changes lies Section 75A of the Income Tax Ordinance, a rule reshaping how high-value real estate deals are conducted.
Whether you’re a buyer, seller, or investor, understanding this regulation is critical to safeguarding your financial interests. Let’s unpack what this means for you.
Understanding Section 75A: The Ban on Cash Payments for High-Value Properties
Section 75A, titled “Purchase of Asset Through Banking Channel,” explicitly prohibits cash payments exceeding 5 million PKR for purchasing immovable property (land, buildings). The law targets transparency in real estate transactions, ensuring a digital trail for large deals. Here’s how it works:
- Threshold Trigger: The rule applies if a property’s fair market value exceeds 5 million PKR.
- Mandatory Banking Channels: Payments must flow through formal banking methods—online transfers, bank drafts, or cheques. Cash is off the table.
- Focus on Purchase, Not Sale: The regulation binds the buyer, not the seller. Sellers can technically accept cash, but buyers risk severe tax consequences if they flout the rule.
Example: Imagine purchasing a Karachi plot valued at 7 million PKR in cash. While the sale might proceed smoothly, the Federal Board of Revenue (FBR) will later disregard your acquisition cost if you sell the property.
The Domino Effect on Capital Gains Tax
The real sting of violating Section 75A surfaces when you sell the property. Let’s break it down:
- Normal Scenario: Buy a property for 7 million PKR, sell later for 8 million PKR. Capital gain = 1 million PKR. Tax (15%) = 150,000 PKR.
- Cash Purchase Scenario: Buy the same property in cash. Upon selling for 8 million PKR, the FBR treats your entire sale value as the gain. Tax (15% of 8 million) = 1.2 million PKR.
Why? By ignoring the acquisition cost, the FBR effectively resets your profit calculation. This punitive measure aims to deter cash transactions and boost documented economic activity.
Why Does the Law Target Buyers, Not Sellers?
The rationale is strategic:
- Future-Proofing Tax Revenue: By tying compliance to the buyer, the FBR ensures that when the property is eventually sold, the transaction history is traceable. Sellers aren’t restricted, but buyers face pressure to use banking channels to protect their future tax positions.
- The Seller’s Dilemma: While sellers can accept cash, tax-filing buyers will likely insist on bank payments. Non-filers, however, may prefer cash to avoid scrutiny, creating a gray area ripe for negotiation.
Practical Implications for Buyers and Sellers
For Buyers:
- Due Diligence is Key: Verify property values upfront. Even if the seller quotes a price below 5 million PKR, ensure the FBR’s “fair market value” aligns.
- Bank Transactions Only: Use checks, drafts, or online transfers. Retain all receipts and bank statements as proof.
- Future-Proof Your Investment: Non-compliance today could mean a massive tax bill tomorrow.
For Sellers:
- Negotiation Dynamics: Tax-filing buyers may push for bank payments. Be prepared to justify cash demands, especially if the buyer cites Section 75A.
- Undervaluation Risks: Accepting cash might tempt underreporting, but this carries separate legal risks.
The Non-Filer Wildcard
Non-filers operate in a nuanced space:
- Buyers: If your income isn’t documented, cash might seem appealing. But remember, selling later could trigger FBR scrutiny.
- Sellers: Cash offers from non-filers might help underreport sale values, but this strategy is legally precarious.
If you want to know abut the filer, late-filer and non filer , check this our detailed article.
Avoiding Common Pitfalls
- Misjudging Fair Market Value: The FBR’s valuation may exceed the agreed price. Always cross-check with recent area rates.
- Ignoring Paperwork: Even bank transactions need proper documentation. Ensure sale deeds reflect the payment method.
- Overlooking Future Sales: A cash purchase might save hassle now but could cost millions in taxes later.
Section 75A isn’t just a bureaucratic hurdle—it’s a financial safeguard. For buyers, adhering to banking channel mandates protects against future tax shocks. For sellers, understanding buyer motivations helps navigate negotiations smoothly. As Pakistan’s real estate market evolves, staying informed and transparent isn’t just wise; it’s essential.
Pro Tip: Consult a tax advisor before finalizing high-value transactions. A small step today can prevent a financial avalanche tomorrow.
By demystifying Section 75A, this guide empowers you to make informed, compliant property decisions. Share it to spread awareness—because in real estate, knowledge isn’t just power; it’s profit.
