One-time amnesty scheme proposed to calm jittery players in real estate sector

Published: July 14, 2016
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Govt had introduced amendment to increase revenue collection, move has created panic among stakeholders. PHOTO: REUTERS

Govt had introduced amendment to increase revenue collection, move has created panic among stakeholders. PHOTO: REUTERS

ISLAMABAD: A chartered accountancy firm has suggested the government to offer a one-time amnesty scheme to regularise wealth amounting to over Rs7 trillion, currently stashed in real estate, amid fears that investors may start pulling out their money and move it to other countries after recent changes in property valuation laws.

Naveed Zafar Ashfaq Jaffery & Co has sent its recommendations to the government on amendments introduced in Section 68 of the Income Tax Ordinance amid growing resentments among real estate investors.

The proposals, prepared by Ashfaq Tola who is a senior partner of the accountancy firm, were sent to the government a day after Finance Minister Ishaq Dar admitted that small and big investors alike were panicking after recent amendments in the property valuation laws.

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Dar, on Wednesday, held a meeting with senior FBR officials and directed them to call all the stakeholders early next week to find a solution to a problem that the government itself has created.

Till June 30, the value of the property for tax purposes was determined on the basis of deputy collector rates, which in most cases was several times lower than the prevailing market rate. For instance, the official collector rates in Defense Karachi is Rs1,650 per square yard while the FBR has unearthed transactions carried out at a whopping Rs155,000 per square yard rate.

Such a difference between the actual market rate and the collector rate resulted in parking of over Rs7 trillion in the real estate sector over a period of time, which the government is now trying to bring in the documented economy.

Through Finance Act 2016, the government got an amendment in section 68 of the Income Tax Ordinance approved. Now the fair market value of any property will be determined without taking into consideration the value fixed or notified by any provincial authority. It will be determined on the basis of valuation made by a panel of approved valuers of the State Bank of Pakistan.

Pitfalls

In his proposals, Asfhaq Tola noted that the change in the procedure for the valuation of immovable property may result in collusion between valuers and tax officials for financial incentives, which may result in loss of revenue to the exchequer. He said that there was also a possibility of collusion between valuers and taxpayers to understate the value of a property to reduce their capital gains tax liability. The valuation of different properties by different valuers may result in differing values resulting in difficulty of benchmarking as the process of valuation is judgmental, he added.

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Tola said that the changed procedure might result in unnecessarily excessive litigations as the taxpayer as well as tax officials may disagree with valuations of each other’s appointed valuers due to no benchmarking.

“The most adverse impact will be flight of capital due to fear of levy of additional taxes and resultant default surcharge and penalties”, he added.

Solution

The firm has proposed three solutions to come out of this quagmire, importantly a tax amnesty scheme. It has suggested that a one-time amnesty scheme may be introduced to declare the property at actual cost and pay taxes at 2% or 3% on the amount of difference between declared cost and actual cost. Such differential amount may be added to declared assets after availing the scheme and payment of taxes. If the property is held for more than five years, no such taxes may be paid, said Tola.

According to his working, on a property that has a market value of Rs62 million but the collector value is only Rs7 million, the government may collect Rs1.1 million extra tax at 2% amnesty rate.

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The second proposed option is to charge a fixed tax at a rate of 3% to be paid at each time at the sale of property, which is to be charged on the amount of difference between collector value and market value.

The final option is that provinces must be convinced to revamp values in valuation table notified by the collector of the districts under section 27-A of the Stamp Act, 1899 at par with the current market values. In cases where the difference between values as per valuation tables and market value is substantial, the values may be gradually increased over a period of 2 to 3 years.

Tola argued that the 18th amendment in the Constitution has empowered the federal government again to make laws with respect to the capital gains on immovable property, which used to be provincial domain before 2010.

Published in The Express Tribune, July 14th, 2016.

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Reader Comments (17)

  • Habib
    Jul 14, 2016 - 9:02AM

    Vision is required by all tax law enforsement agencies to make any changes in Pakistan
    munshi Of Wazir Ali company may be had shortage of vision under the umberalla of PM jageerdarana style of running the govt and abusing tax payers
    monies Recommend

  • Iqbal
    Jul 14, 2016 - 9:22AM

    The proposer’s closeness to FBR and finance minister leaves a lot to understand motives behind such rediculous law and equally interesting solutions. Recommend

  • a+b=b+a
    Jul 14, 2016 - 10:24AM

    …and the valuation of all property abroad?Recommend

  • Sodomite
    Jul 14, 2016 - 11:19AM

    Car is a loose cannon. He will destroy the tax culture that PMLN has promoted over the years and bring chaos and corruption like we have never known.Recommend

  • Ali
    Jul 14, 2016 - 11:27AM

    Realestate investors are NOT investors! They add NO real value to the economy, but rather restrict genuine businesses from working by making it significantly more expensive to lease space. Getting real estate prices to be normal will be a blessing for everyone (other than the fake investors who hoard up land!)Recommend

  • Rustam
    Jul 14, 2016 - 12:08PM

    Capital of flight is going to happen in any of the proposed solutions, if impact of revaluation is calculated on wealth tax.Recommend

  • Jul 14, 2016 - 12:14PM

    and it should be named as NRO of real estate.Recommend

  • Nirmal
    Jul 14, 2016 - 12:51PM

    The munshi of noora league is just putting whole real estate sector on stake so they can afford noora’s medical treatment in UK alongwith shopping at Harod’s and to finance royal flight back to lahoreRecommend

  • omer
    Jul 14, 2016 - 2:06PM

    @Ali:
    well saidRecommend

  • seaman
    Jul 14, 2016 - 2:29PM

    I do not understand why are people calling it a new tax. Its not a new tax , government will just value the land at the “current price” and not at the price which was set 20 years ago and charge tax on the current price. No one wants to pay taxes in Pakistan. Instead of taking part in constructive business activities people want to invest in empty plots and flip them for profits. Adds nothing to the economy. Recommend

  • Rustam
    Jul 14, 2016 - 3:20PM

    @Nirmal: Are not you mixing up two different issues? Is extravaganza of the government not a separate issue which should be curbed in any case? The budget proposal is to fix what is wrong. If government is misusing the funds, should it stop correct initiatives, like the one this proposal in the budget handles? Recommend

  • Rustam
    Jul 14, 2016 - 3:41PM

    @Ali:
    I agree with your that the structure of real estate system is mainly a tool for hoarding black money and averting capital gain and wealth taxes, with the lucrative return. It is not an investment but easy money trading. Therein Deputy Collector fixed price is the main culprit.
    While I do not favour PMLN, we have to give it credit on this issue that it made attempts to fix the problems. Secondly, it is also on record and narrated in this article that Punjab government did try to correct Deputy Collector prices, to some extent. Did we see any efforts elsewhere? What about Sind government and its opposition party? Recommend

  • qaiser ahmed
    Jul 14, 2016 - 4:12PM

    No amnesty. Prosecute each and everyone of the law breakers.Recommend

  • moin
    Jul 14, 2016 - 4:31PM

    govt should reduce the taxes to 1/4 th and register the property in actual price.Recommend

  • ibs
    Jul 14, 2016 - 7:55PM

    This is just going to open more doors of corruption.

    Valuers and SBP officials will become the middlemen and you will ultimately have to pay them to value your property at a price you seem fit.
    SBP is a clean organization, corruption is going to be the norm if this moves forward.
    Overseas Pakistanis will not invest in Pakistan and will decide to park their money elsewhere. Local investors will do the same.
    4.At the end, property transactions will go down & so will the prices. The revenue the government collects in taxes will also go down. It made more sense for the government to collect taxes on high volume than to collect high taxes on low volume and low valuation.
    Recommend

  • Malik
    Jul 14, 2016 - 11:38PM

    Why should there be an amnesty on the colossal gains in real estate sales, where only individuals benefit with no tax to the State. The only concession should be for first home buyers or house made for self occupation. Unless CVT is imposed on real estate sale deeds on actual revised market values, there will no way, investors in Pakistan will invest in industry or trade which offers employment opportunities. It seems that tax evaders will again have their way in Pakistan if another amnesty scheme is announced.Recommend

  • Shakir Lakhani
    Jul 15, 2016 - 12:31PM

    “The most adverse impact will be flight of capital due to fear of levy of additional taxes and resultant default surcharge and penalties”. Really? Flight of capital has been going on for the past 68 years, despite property purchasers/speculators/investors not paying taxes on real amount of properties. No, the real solution is to recover taxes not only on real property values but also on concealment of income by these criminals. No leniency should be shown to them. They have been looting the country with impunity, it’s time to recover thirty percent tax on real property values and concealed incomes to increase state revenue.Recommend

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