No understatement: Govt acts to catch property tax evaders

Proposal’s inclusion hinges on consent of the provinces.

ISLAMABAD:

In a bid to stop tax evasion that is estimated at two-thirds of the total potential in the real estate sector, the federal government is considering a proposal to acquire private properties at about 20 per cent over and above rates declared in transfer deeds.

Sources told The Express Tribune that the proposal is part of enforcement measures that the Federal Board of Revenue (FBR) is considering for the new financial year beginning July, in order to pressure property owners under-declaring the value of their property to pay the accurate amount in tax.

Currently, the people involved in the real estate business drastically understate the value of their properties to evade taxes, charged by federal and provincial authorities, sources in FBR said.

The real estate sector is becoming a haven for people to make virtually tax-free gains besides parking their ill-gotten money, they added. The government is considering introduction of a clause in the Finance Bill 2014 that will authorise it to buy the property by paying rates over and above the prices declared in property transfer deeds, said the sources.

The rate could be in the range of 15 to 20 per cent over and above the one declared in the deed documents, they added. India is already implementing a similar scheme where the Indian states have the right to buy the property by paying higher rates.



However, the proposal’s inclusion in the budget and its subsequent implementation hinges on the consent of the provinces. In its first budget, the PML-N government already revised the tax rates on property income by expanding slabs from three to six, which did not yield positive results.

During the last fiscal year, the federal government collected merely Rs554 million on account of capital value tax (CVT) on property, including Rs449 million paid by non-commercial property buyers, according to FBR documents.

During the first nine months of the current fiscal year, the four provinces collected Rs7 billion in property taxes, including taxes on residential buildings, showed documents from the Ministry of Finance.  According to various studies, the taxes collected by federal and provincial governments are even less than one-third of the total taxes that can be raised without further increasing tax rates.

However, according to tax experts, the move will not work until the government revises upwards collector rates and brings these at a par with market value. They also suggest that the government give a one-time exemption by allowing taxpayers to bring the value of their properties declared in wealth statements at a par with market value.

Provincial taxes on real estate currently include the stamp duty, tax on transfer of property, the CVT on property transactions and the urban immovable property tax. Within property-related taxes, the taxes which are considered as having the maximum revenue-yielding potential are the urban immovable property tax and the capital value tax.

Power to issue SROs

From the new fiscal year, the federal government is also considering withdrawing the FBR’s power to issue Statutory Regulatory Orders (SROs) aimed at curtailing discretionary powers leading to corruption in the machinery, said the sources.

The move comes under discussion at a time when the FBR issued an SRO last week without obtaining prior approval from Finance Minister Ishaq Dar. Through SRO-351, the FBR gave policing powers to its intelligence and investigation unit, allowing it to conduct search operation without even having concrete evidence. The business community made a hue and cry against the move.

The finance minister on Friday suspended the implementation of the SRO-351 and formed a committee comprising representatives of traders associations, chambers of commerce and industry and FBR Chairman to review the fairness of the SRO, according to a finance ministry annoucement. “The said SRO came to the notice of the finance minister last evening which was issued without his approval,” stated the handout.

Published in The Express Tribune, May 18^th, 2014.