ISLAMABAD: The government on Monday showed its intention to retreat from its stance of taxing gains from the property business at fair market value and constituted a committee of stakeholders to find a solution after property transactions came to a halt.
The committee would comprise real estate agents, representatives of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and the Federal Board of Revenue (FBR).
The constitution of the committee underscores flaws in the budget-making process, which the National Assembly passed just last month.
The decision to constitute the committee was taken after a meeting between the tax authorities and the real estate sector representatives.
Special Assistant to Prime Minister on Revenue Haroon Akhtar Khan chaired the meeting.
Through the Finance Act 2016, the government got an amendment to Section 68 of the Income Tax Ordinance approved, allowing the FBR to determine the fair market value of any property without taking into consideration the value fixed or notified by any provincial authority.
The fair market value will be determined on the basis of valuation done by a panel of approved experts of the State Bank of Pakistan (SBP).
Till June 30, the value of property for tax purposes was determined on the basis of rates set by the district commissioner, which in most cases were several times lower than the prevailing market rates.
The real estate agents claim that after recent changes in the law, the property transactions in major cities have stopped.
The estimated size of black money parked in real estate is around Rs7 trillion, according to officials.
Experts argue that such vast powers to the FBR or the SBP nominated experts would open new avenues of corruption – a concern also expressed by the real estate agents during Monday’s meeting.
The committee would submit its recommendations to Finance and Revenue Minister Ishaq Dar by the end of current week, said an official of the FBR.
“Stakeholders have expressed concern over four clauses of the income tax law that deals with taxation on real estate in addition to objecting to the procedures being adopted to calculate these taxes,” said Chaudhry Abdul Rauf, President of the All Pakistan Real Estate Agents Association.
He said the association objected to the government’s decision to charge a flat 10% capital gains tax on properties sold within five years of the holding period. “The association sought reintroduction of the slab rates instead of charging the fixed rate,” said Rauf.
He said the valuation system under Section 68 was not acceptable and feared it would open new avenues of corruption.
The association also objected to the increase in withholding tax on the sale and purchase of properties in the budget for 2016-17.
Naveed Zafar Ashfaq Jaffery & Co – a chartered accountancy firm – has proposed three solutions. It has suggested that a one-time amnesty scheme may be introduced for declaring the property at the actual cost and paying taxes at 2% or 3% of the amount of difference between the declared cost and the actual cost.
Such differential amount may be added to the declared assets after availing the scheme and payment of taxes.
The officials said any solution would be for the future and past property transactions might have to be condoned by offering an amnesty scheme.
Property dealers asked the government to gradually increase the property valuation over a period of five years, however, government officials proposed the increase in rates over three years.
The new property valuation rates would be lower than the fair market value but significantly higher than the rates fixed by the district commissioner, they added.