Deemed Income Section 7E

Introduction

The concept of deemed income Section 7E of the Income Tax Ordinance 2001 means that if a person owns capital assets  defined as given below such person shall be deemed or considered to earn an income equal to 5% of fair market value of such capital asset. Hence, such income will be subject to income tax @20% as given in Division VIIIC of Part-I of the First Schedule of the Income Tax Ordinance 2001.

Exemptions: Deemed Income Section 7E of Income Tax Ordinance 2001

Following capital assets will be exempt from income tax under Section 7E of the Income Tax Ordinance 2001.

• One capital asset
• Premises owned for running business by persons whose name was appearing in the Active Tax-Payers List (ATL) during the year
• Agricultural land exclusively used for the purpose agriculture excluding the farm house
• Assets allotted to                                                                                                                                          a) Shaheeds of Armed Forces or their dependents,                                                                                      b) a person who  died in the service of armed forces or federal or provincial government,                        c) a person injured in a war while the service of armed forces or federal or provincial government,            d) the ex-service man or serving person of of armed forces or federal or provincial government being the original allottee of the capital asset duly certified by the Allotment Authority.
•  Any property on which tax was paid under the provisions of the Income Tax Ordinance, 2001.
• In the first year of purchase of the capital asset where tax has been paid under Section 236K.
• Capital assets owned by the federal, provincial governments, local and development authority.
• Assets owned by builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Businesses and Professions
• In all other cases where fair market value of asset does not exceed Rs. 25 million.
• Capital asset for deemed income Section 7E is defined as “property of any kind held by a person, whether or not connected with a business, but does not include –                                                                                (i) any stock-in-trade, consumable stores or raw materials held for the purpose of business;                           (ii) any shares, stocks or securities;                                                                                                                (iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or                                                                                              (iv) any movable asset not mentioned in clauses (i), (ii) or (iii); 

Clarification: Deemed Income Section 7E of Income Tax Ordinance 2001

According to the Section 236C (2A) of the Income Tax Ordinance 2001, a person registering, recording or attesting transfer of any immovable property shall ensure that seller or transferor has discharged his tax liability under Section 7E of the Income Tax Ordinance 2001 with an evidence.

The Federal Board of Revenue (FBR) has issued a clarification under Circular No. 01 of 2023-24 regarding payment of tax as required under Section 236C(2A) as given below:

• If the name of seller or transferor is present on the Active Tax Payers List (ATL):                                            i) If the seller/transferor has not already discharged the tax u/s 7E while filing his income tax return of the previous year, such person shall produce an evidence of payment of tax under section 7E of the Ordinance to the transferring authority. A separate payment challan is available in the FBR online payment system.                                                                                                                                              ii) If the seller / transferor has already declared the said asset with his income tax return for the previous tax year or the said seller/transferor is not required to pay tax u/s 7E due to any stay granted by any court of law or authority, then the seller /transferor will furnish a certificate on Form ‘A’  duly issued by the Commissioner Inland Revenue.
• If the name of seller or transferor is not present on the Active Tax Payers List (ATL), such a person shall provide the proof of payment of tax under Section 7E to the transferring authority on CPR available on the FBR online payment system.

The Federal Board of Revenue has further clarified vide Circular No. 3 of 2023-24 that “Circular No. 01 of 2023-24 will not apply in cases falling in the Jurisdiction of the Honorable Lahore High Court with reference to the Judgement in WP no. 52559 of 2022 dated 06-04-2023 unless the said judgement is reversed, suspended or vacated.”

FAQs: Deemed Income Section 7E Income Tax Ordinance 2001

Q. What is deemed income Section 7E tax in Punjab?

Ans. FBR has suspended the implementation of Section 7E vide Circular 3 of 2023-24  in the areas under the jurisdiction of Lahore High Court in pursuance of the LHC judgement in WP no. 52559 of 2022 dated 06-04-2023 till an order by the competent court to undo the judgement of LHC.

Q.  What is Section 7E of FBR?

Ans. A person owning a capital asset will deemed to have earned an income equal to 5% of the fair market value of such an asset in a tax year.

Q. Are overseas Pakistani exempt from income tax under Section 7E?

Ans.  FBR has clarified vide Circular No. 03 of 2023 that non-resident Pakistanis are exempt from income tax under Section 7E of the Income Tax Ordinance 2001.