Nature of Property Tax Base

Nature of Property Tax Base

When reading about property tax, one can find it a bit difficult to grasp its nature due to the inherently dual nature of property valuation. A property or real estate generates financial benefit in two ways:

1. It generates rent for its owners; and
2. It increases its capital value over time.

The rent or revenue-generating capacity makes it suitable for a property to be taxed as income. That is, rent is an income; thus, the property should be subject to income tax. (For more information on income tax, visit Understanding Income Tax.)

Meanwhile, the ever-increasing capital value of a property makes it suitable to tax it as an asset or a piece of wealth. That is, the capital value represents asset value; thus, the property should be subject to wealth tax.

What should be the tax base for determining tax liability on a property for the purpose of property tax assessment? Should it be rent, or capital value? Property tax is neither income tax nor wealth tax.

Most governments around the world use capital value, e.g., market value or purchase value, for assessing value of property to determine property tax liability. For example, in most of the states of the US, county assessors use market value for determining property tax liability.

In some countries, notably Pakistan, property assessors use annual rental value for determining property tax liability.

Use of capital value as the property tax base makes property tax similar to wealth tax, and use of rental value as the property tax base makes property tax similar to Income Tax.

The point to ponder is:

Does property tax represent a case of double taxation?

Five Marla Tax Exemption: Punjab Pakistan

Property Tax Exemption: Five Marlas

Residential houses of five marlas or less not falling in Category A are exempt from property tax. A five-marla house will attract payment of property tax only if it has a Gross Annual Rental Value of Rs 5,000 or more and is situated in a locality where Category A has been applied. Category A is the category of the valuation table having a rate of Rs 15 per square foot per month, which refers to the monthly rental payment a house is capable of fetching. 

Is the five-marla exemption only for owner-occupied houses?

No, it is for both rented and owner-occupied houses. You do not have to pay property tax on a residential house measuring up to five marlas in size even if you have let it out.

Is this exemption available for a 10-marla house co-owned by two persons?

No. Property tax is on property, not on the owners of the property; therefore, it is the property which determines the property tax. Two persons owning a 10-marla house are co-owners of a house measuring more than five marlas, and thus are not entitled to the exemption from payment of property tax.

Punjab Pakistan: Exemption of property tax: case of a widow owner

What is the exemption from payment of property tax available to a widow owner of a property?

A widow owner of a property is entitled to an exemption of Rs 12,150 from payment of property tax. This limit is subject to the share of the widow in the property and to the total amount of exemption up to Rs 12,150 out of the tax payable if the tax is more than Rs 12,150.

I am a widow and I still do not have an exemption from payment of property tax. Why?

In most cases, a widow fails to get total exemption from payment of property tax for one of the following reasons:
1.       The widow is not the owner of the property;
2.       The widow is a partial owner of the property;
3.       The tax is more than the exemption limit of Rs 12,150;
4.       The tax is for the period during which the husband of the widow was alive;
5.       The widow no longer has valid title to the property.

Procedure to apply for exemption

1 - Preparing to apply

As a widow seeking exemption from payment of Property Tax, you should note following points before applying for exemption:

1 - You must have a valid title of the property in your name. It means you have proof of ownership of the property for which tax is payable in your name;

2 - If you have only a share in the property ownership, you must have documentary evidence showing yor share in the property;

3 - You must have a CNIC showing your name and your husbands name e.g. name on CNIC may be Zahra W/O Tanveer, or Zahra Wd/o Tanveer; and

4 - You must have photocpies of the above documents before proceeding to the next step.

2 - Writing the application

After getting photcopies of necessary documents. you can proceed to prepare application for exemption as under:

1 - Place the notice of tax demand before you for essential information given on it;

2 - Address the application to the Excise and Taxation Officer;

3 - Write an application on a plain paper demanding exmption from the Excise and Taxation Officer;

4 - Note your property number from the tax demand notice and write it in the application showing property number, ward number, block number, and name of the inspector incharge if avaiable with you;

5 - Prove your status of being a widow by attaching a copy of the death certificate of your husband with the application and mentioning it as enclosure in the application;

6 - Prove your status of being an owner of the property by attaching a copy of the title documents;

7 - Attach a copy of your CNIC with the application; and

8 - Write your contact details for correspondance.

3 - Submitting the application

1 - Affix a Court fee of Rs 4 on the application; and

2 - Submit the application to the Excise and Taxation Office.

Exemption of property tax: case of a retired public servant

Property Tax, Punjab, Pakistan

What is Property Tax?

Property Tax in Punjab, Pakistan

Property Tax is the tax levied under §3 of the Punjab Urban Immovable Property Tax Act of 1958. Property Tax is assessed and collected in rating areas, which are generally urban areas only. You can ascertain its amount if you know the Annual Rental Value of a property: the property's Annual Rental Value is the base of its property tax.

Who collects property tax?

The Excise and Taxation Department, Punjab, Pakistan collects property tax. The Department also performs the following additional functions:

1. Assessing and collecting all provincial taxes except Land Revenue;
2. Enforcing the prohibition of liquor, intoxicants, and narcotics;
3. Enforcing other public health measures designed to suppress and regulate the movements of dangerous drugs and narcotic substances.

What is the scope of property tax?

The Punjab government has levied property tax only on buildings and land within the boundaries of rating areas, which are sizable towns only. For a clear legal definition of “rating area”, one may see §§ 116 and 117 of the Punjab Local Government Ordinance of 2001.

What is the base of property tax?

The property tax base is the Annual Rental Value of a property or land. Property tax is 20 or 25 percent of the Annual Rental Value of a property or land.

You can calculate the Annual Rental Value of a property using its monthly rent or monthly notional rent. For example, if a property has monthly rent or monthly notional rent of Rs 2,000 per month, its Gross Annual Rental Value is Rs 24,000, that is, Rs 2,000 x 12.

The Annual Rental Value is 90% of the Gross Annual Rental Value. It is the amount left when you deduct a 10% rebate for repairs from the Gross Annual Rental Value. For example, if the Gross Annual Rental Value is Rs 24,000, the Annual Rental Value is Rs 21,600: Rs 24,000 minus 10% of Rs 24,000 or Rs 2,400.

It is important to remember that the assessing officer who assesses a property for property tax purposes uses the monthly rent or monthly notional rent to calculate the property's Annual Rental Value. Monthly notional rent is an estimated rent per square foot of building (or per square yard of land).

How can you calculate property tax?

Property tax is 25% of the Annual Rental Value when the Annual Rental Value is above Rs 20,000 and 20% otherwise. For example, if the Annual Rental Value is Rs 21,600, property tax is Rs 5,400.

Who pays property tax?

One important point to note is that the tax is on property, not on a person. However, it is payable by the property owner. The government may collect property tax from the tenant or possessor of a property if the owner fails to pay the tax, e.g. if he is not in Pakistan, willfully avoids payment of the tax or contact with tax collectors, etc.

What measures can the Excise and Taxation Department take to recover property tax from you?
If you have any questions pertaining to property tax, feel free to ask.

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Property Tax, Punjab, Pakistan: All the roles