Real estate sector in Pakistan is known for years as the ideal venue to invest money earned through dubious means. It is recognized to be the least regulated sector of the economy storing vast sums of money that does not fall into national financial ambit. Under international pressure Pakistan was made to check the inflow of illegal money in the real estate market and to take actions to regulate it accordingly. Despite its dubious legal status the real estate sector has shown tremendous progress and prices of properties have sky-rocketed. The efforts of the government to make inroads in this sector with a view to increase its tax revenues have not been successful. Any effort to regulate this sector causes a temporary downturn but it soon normalizes.
PTI current government has taken a clear stance against land grabbing and encroachments but they also simultaneously need to focus on tax reforms for the real estate market to wrestle with the FBR zeroing in on the real estate transactions. It is widely observed that the revenue contribution from property tax should be 1% of the GDP in developing countries and many countries try to adhere to this requirement but to no avail. The result is that, in reality, real estate tax in developing countries is 0.1% of the GDP and rarely 0.5%. It is pertinent to observe that in developed world such as in America, Canada and Australia property tax collected is close to 2% of the GDP on average greatly equipping governments to undertake public welfare measures.
It is a well-known fact that the real estate sector is the second-largest sector of job provider and also stimulates the growth of industries like cement, steel and other building material. However, the negligible taxes on home, land and other forms of real estate in Pakistan is one of the key issues that impedes achieving tax revenue targets. Pakistan spends $5.2billion on constructions in a year and many more billions are spent on buying residential and commercial plots but the contribution of real estate sector stood at only Rs.23 million or less than 0.1% of the size of national economy in the previous fiscal year. This is indeed a worrying spectrum that is very harmful to general economic conditions of the country.
One of the key reasons for low tax collection from the real estate sector is that all big housing societies do business without recording their transactions. The FBR has also noted that these big real state tycoons stood at mere Rs.232.7 illion in the last fiscal year. Similarly, the other important reason for the low collection of real estate taxes in Pakistan is the very low tax base and exemptions given to the sector on taxes due to close relations between these big giants and politicians in the government. In this connection it may also be noted that property tax collection by provinces sharply fell 20% to Rs.4.81billion during the previous fiscal year.
The methodology of calculating the value of real estate sector is somewhat cumbersome as it follows a policy determining three rates for one property: a) actual price, b) deputy collector rate fixed by the provincial authorities and c) FBR evaluation. There is no reconciliation between the vast differences existing between these rates and there appears no methodology to rationalise them. The result is that the buyer uses undeclared assets to pay the difference between the actual market rate and FBR valuation rate. There is therefore an urgent need to rectify this methodology so that the process is rationalised.
In the wake of this scenario, FBR is insistent that unless provincial governments abolish the deputy collector and stamp duty rates, the pre-emption scheme will have hardly any chance to succeed. The provinces collect 8% of the value of property transaction in taxes. In 2019 FBR has now notified new rates that, however, still not commensurate with the market price. The average 25% to 30% increase in property valuation rates for collection of federal taxes under the second phase had to be implemented from July last year. The federal government has widely parleyed with real estate sector stakeholders and had decided to bring deputy collector rates at par with the prevailing rates in three phases. However, the delay caused in implementing such measures has already increased problems associated with black money going into real estate sector that may further lessen the chances of Pakistan surviving being blacklisted by Financial Action Task Force (FATF).
Source: by Asrar Rauf at theweekender.com.pk