Real estate sector, govt close to breakthrough on controversial tax decisions

Stakeholders propose ways to deal with low revenue generation

ISLAMABAD: The government is close to achieving a breakthrough in talks with the real estate sector over the contentious issue of taxing gains from property investment. The development comes after investors outright rejected the fair market valuation system introduced through an amendment earlier this month.

Both sides are expected to finalise a deal to settle issues of pre-July 1 property transactions and income tax rates for transactions carried out after July 1, 2016.

The proposed deal would allow the settlement of past transactions at a fixed income tax rate of around 5% while future ones might be subject to half the fair market rate but significantly higher than the prevailing district commissioner rates.



Such an arrangement is expected to close doors for corruption at tax authorities as well as valuers.

The decision now rests with Finance Minister Ishaq Dar, who would today (Thursday) either vet or reject the proposal; however, any new arrangement would be in deviation to the fair market property valuation mechanism, which was introduced through the Finance Act 2016.

The tax authorities and representatives of the real estate sector met on Wednesday - the second time within 72 hours to address the issue, which has crippled the real estate sector in the past three weeks.

Special Assistant to the Prime Minister on Revenue Haron Akhtar Khan led the government team while the real estate sector representatives included business leaders, property agents and representatives of big housing societies including Defence and Bahria.

“The real estate sector stakeholders would not accept the property valuations determined by the State Bank of Pakistan (SBP) nominated valuers,” said the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) President Abdul Rauf Alam, after the conclusion of meeting with the government.

Till June 30, the value of property for tax purposes was determined on the basis of rates set by the district commissioner (DC), which in most cases were several times lower than the prevailing market rates.

The DC rates are meant only for collecting stamp duties by the provincial governments but it also became a base for collecting capital gains taxes on real estate transactions.



Real estate agents claim that after the recent changes property transactions in major cities had stopped.

The estimated size of black money parked in real estate is around Rs7 trillion, according to officials. Accumulation of black money in the real estate sector also shows involvement of corrupt FBR officials.

Likely agreement

Real estate sector representatives have floated a proposal to address the government’s concern of low revenue collection.

The FBR collected a meagre sum of Rs750 million in the recently ended fiscal year 2015-16 on account of capital gains tax on property transactions, however, the withholding tax collection from sellers and purchasers was significantly higher.

After changes in section 68 of the Income Tax Ordinance, the sector faces two problems; the fate of transactions carried out till June 30, 2016 and the future rates.

According to the proposal, the government may charge a fixed tax, in the range of 4% to 5%, on the property transactions carried out till June 30. However, under the law such transactions where due taxes are not paid due to under-valuations are subject to either 35% income tax rate or 10% of the gains made on these properties. The penalties are over and above these rates.

If the government agrees to the proposal, it would mean giving an amnesty.

To deal with future transactions, it has been proposed that instead of charging these transactions on fair market value, the government may in the first year set a rate, about 5 times more than the prevailing DC rates but at least half of the actual fair market rates.



Under the proposal, the government may gradually increase the valuation rates over a period of three to four years.

These proposals were in line with recommendations given by Ashfaq Tola - a Karachi based tax expert, last week.

Published in The Express Tribune, July 21^st, 2016.

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