Business

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

Stakeholders propose ways to deal with low revenue generation

Shahbaz Rana July 20, 2016

Stakeholders propose ways to deal with low revenue generation PHOTO: WIKIPEDIA

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.

Taxing real estate: Govt forms body to address concerns of property dealers

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 no longer a safe haven for black money’

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.

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

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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COMMENTS (11)

Amr | 7 years ago | Reply I totally agree with Shakil sb. Overseas pakistani should be considered separately. Most of the overseas sent their hard earned money in pakistan and still there is no incentive for them.

shakil | 7 years ago | Reply Property sector is the only safe investment for retired and oversea Pakistanis. If non professional retired and oversea Pakistanis try to invest in any other business in Pakistan, they get cheated and loose all their savings. Its history...... Real estate is the only safe business for them to keep their entire life saving safe. Big problem for oversea, they wont bring money in Pakistan.

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aamir | 7 years ago | Reply I completely agree with the views of naeem & others. Govt should talk to the real tax payers in this issue rather than talking to that black money makers. Moreover steps be taken to bring property prices in the range of "aam aadmi" and i believe that mojority of a common man does not earn 20,000/ per month.

qbc | 7 years ago | Reply I don't understand why people are for the new tax on property. This sector employs hundreds of thousands of pakistanis if not millions of poor people in Pakistan from the builders to cement factories to the properties dealers. The Pakistanis who live abroad who have already been taxed in there home country (ie white money) will stop sending remittance for properties so deprive pakistans economy investment also there will be no US dollars or UK sterling which are the life blood of Pakistan. If the property sector goes down that will affect everyone even people who are poor if they live with there family that house will come down. Also if you save all your life you will have to pay a lot more taxes. What about the people who have worked all there life and paid tax then finally bought with white money they will suffer now. If there is a lot less buying and selling like there has been since 1st of july the government will get less tax not more.The people who use black money to buy property which is wrong will continue to do so but less frequently so it does not stop that problem. There must be a better way a more fairer way other wise the normal people will suffer also it is bad for the economy. It means Pakistan is closed for business get tax but it must from every sector and not so excessive. Maybe tax on your second property not on your first or property dealer can not charge what he or she wants transfer fees reduced for first property capital gains tax if it is over a certain level that would make it fair.

Naeem | 7 years ago | Reply @Shakir Lakhani: How do you tweet such that all world can see what we are saying to FBR or finance ministry's account. Cant believe, the ministry is reasoning with tax evaders and cheats. How can we create stink so our voice is heard. I have personally seen estate agents mocking ' middle class like myself' when we are prized out of market. They laugh at our hard work and the taxes we pay. I am a high income professional and even with a sizeable balance have seen myself been played by people with Black Money. A bureaucrat from Balochistan has been caught with 22 Bungalows in Defence alone. He is only tip of iceberg. This wouldn't have happened if he was asked about his sources of income.

Shakir Lakhani | 7 years ago | Reply @ Arif: You can tweet a message to @FinMinistryPak. Just ask them to take into consideration the views of those Pakistanis who can't afford to buy a house due to these speculators/investors who manipulate the property market.

freed | 7 years ago | Reply IMF bossses will start to tighten the noose while corrupt leaders will flee with their assests in dubai, uk and panama.

Arif | 7 years ago | Reply @Naeem - agree with your thoughts completely, and that's precisely what I've been thinking. Why doesn't the government ask me, an honest taxpayer, my opinion rather than sitting down with people dealing on huge piles of black money. More than the proposed CGT, it was the legislation to value properties at market rate which was going to check the huge inflow of black money driving prices in the sector. Now it seems that the government is going to allow people to continue hiding their black money by declaring their property at a fraction of its real value. Over the last couple of days, I have been trying to find government email addresses to write to. Interestingly, there seems to be no published email address for the Finance Minister, or for Mr,. Haroon Khan, the Special Assistant to the PM on Revenue who has been chairing these meetings with the black money lobby. I did find the email address for the Chairman FBR, but that email bounced back with the message that the email box was full.

Yousuf | 7 years ago | Reply Agree with Naeem. As the black market money is depriving poor of their right to have a housing. And why amnesty? these tax thieves must be bring to books for evading taxes. there must be a protest and campaign by "aam aadmi" to ask government to ensure right prices of the property. These investors have made housing as a commodity....for God sake..its not a commodity!

Rehmat Ali | 7 years ago | Reply What about tax on Agricultural income? Every year in budget, relief given on agricultural business related things such as subsidies on fertilizer,electricity etc. The reason are, Agricultural lands belongs to most of elites,defense personals,rulers,influential landlords,policy makers and corrupt politicians. So called political parties are reluctant to bring Agricultural income in tax net. Every time looks to impose more taxes on things other than agricultural income. Its a matter of question!

Naeem | 7 years ago | Reply Shame on them. So essentially the government is in cohoots with tax evaders, cheaters and manipulators. Will the FBR, meet me, a tax payer, who has been robbed of a chance to buy house because of these rogue estate agents. Where is the governent when I want those with black money to be pushed out of the market. Where is my right to fairness?

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