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What is CVT and How to Calculate it?

02/07/2019

What is CVT and How to Calculate it?

Recently, the PTI government has presented its much awaited budget and in order to increase the official income, it proposed to increase the tax net in Pakistan, which means it has levied more taxes. You must have observed a spike in official prices of properties in almost all major cities in Pakistan in a lieu to counter tax evasion. It is because several property owners tend to show less value of their properties to evade property taxes. To fix this loophole, the government has formulated a new property valuation table with DC rates increasing around 20% in more than 21 cities across Pakistan.

If you are still confused about Capital Value Tax (CVT), let's have a look at what this tax means and how it will effect buying and selling of property in Punjab.

What is CVT?

Capital Value Tax (CVT) are the prices set by the FBR. They are the official rates of the property set by the District Commissioner offices across the country. Previously, they were much lower than the market rates for land.

So, when you buy land, for example, you usually pay the market rate. But you pay taxes on it, which are determined by the official government price of the land. The government is fixing this anomaly in order to get people pay what should be closer to a realistic property value. The FBR announced the new DC rates for major cities: Abbottabad, Bahawalpur, Faisalabad, Gujrat, Hyderabad, Islamabad, Jhang, Jhelum, Karachi, Lahore, Mardan, Multan, Peshawar, Quetta, Rawalpindi, Sahiwal, Sargodha, Sialkot, Gujranwala, and Sukkur.

Whenever a person buys a piece of land, the government charges the buyer withholding tax and the seller capital gain tax. In reality, however, what usually happens is that the buyer and seller give a lower price for the property so they can pay less tax each. This is called undervaluing property.

For instance, take the case of a person buying a house for Rs5 million, which is its market value. The buyer asks the seller to make a sale deed for only Rs3 million. This undervalued price tag allows the buyer to save on withholding tax and the seller saves on paying capital gains tax. According to Finance Act, 2006, the Capital Value Tax or CVT is levied at the rate of 2% of the recorded value.

Currently, in Punjab for urban property, the CVT stands at 2% but you will have to pay 5% tax in form of 2% CVT and 3% Stamp Duty. The CVT was levied on the buyers in Punjab back in 2011, where they will have to pay the CVT for all sizes of residential and commercial properties located in urban areas.

The budget 2018-19 has no impact on CVT and the percentage has also not been changed. CVT remains at 2% but the DC rates of properties are revised last year by FBR in order to create parity between market value and the rates on which property taxes are collected.

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