Business

Property tax measure: Govt overestimates revenue collection from real estate

Gap between market value determined by official valuers and DC rates not as wide as govt initially worked out

Shahbaz Rana July 27, 2016

bahria icon tower in karachi 039 s clifton photo afp

Bahria Icon Tower in Karachi's Clifton. PHOTO: AFP

ISLAMABAD: The gap between prevailing market prices and official property rates is not as wide as initially perceived by authorities, except in Karachi and Islamabad, said a top aide to Prime Minister Nawaz Sharif Wednesday.

Still the market value, assessed by government-hired valuers, was at least three to 15 times higher than the district commissioner-determined (DC) rates, said Haroon Akhtar Khan, Special Assistant to Prime Minister on Revenue. The difference is more profound in the two cities than elsewhere and underscores the extent to which the real estate sector has escaped taxation.

These rates had been set for working out stamp duties on property transactions, which eventually became a base for determining income gains and hiding the real values of properties.

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Tax authorities’ initial opinion was that values declared by property dealers and investors were 50 times to 100 times lower than the prevailing market rates. However, this has turned out not to be the case.

Real estate sector view

The representatives of the real estate sector on Wednesday also shared their fair market valuations of 21 major cities of the country. As expected, their values were far lower than the values worked out by the government-hired valuers. According to real estate sector representatives, market values are twice to five times higher than the DC rates.

Tough negotiations to work out fair market values of the properties are expected due to significant gap between stakeholders-determined rates and government rates. The new determinations will become the base for giving tax amnesty scheme on past transactions, estimated at Rs7 trillion.

The government is expected to increase DC rates to 50% of the to-be determined fair market values. After that, it may set a 5% rate to whiten the black money parked in the real estate. The 5% will be charged on the basis of difference of DC rate and the newly determined rate, therefore, the stakeholders on Wednesday pitched lower valuations.

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Govt’s misconception

The lower than perceived market values of the properties shows how much the government thought it could earn from the real estate sector. It also dispels the impression, to some extent, that stakeholders were grossly understating the values aimed at hiding their real incomes and evading taxes that the government gets on property transactions and the gains made on these transactions. Still, the exchequer was sustaining losses due to three to 15 times gap between the fair market value and DC rates, depending upon the city and the area.

In the budget 2016-17, the taxable period for capital gains on disposal of immovable property was extended from 2 years to 5 years. The CGT rate was kept unchanged at 10%. Through an amendment to section 68 of the Income Tax Ordinance, 2001, the task of determining fair market price of property has been given to professional valuers approved by the SBP. This caused uncertainty in the real estate sector, halting transfer of properties.

FBR’s valuation

Haroon Akhtar Khan said that the FBR has completed the valuation exercise, which has also been vetted by experts. He said that there was no major difference between the valuations worked out by the Federal Board of Revenue and the values assessed by the government-hired experts.

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He said the information has also been exchanged with the real estate sector representatives.

The special assistant said that in case of Karachi, the values of the properties were 5 times to 13 times higher than the DC rates. Similarly, in case of Islamabad, the difference between DC rate and fair market value was in the range of 8 times to 15 times.

The fair market value of the properties in Peshawar was about 6 times to 8 times more than the DC rates.

He said the difference was not much in case of Lahore due to occasional increase in DC rates. Akhtar said that in case of small cities, the gap between the official DC rates and fair market value was also not big.

An official of the FBR said that the market rates in Gujranwala, Sialkot and Gujrat were about 200% more than the DC rates.

Published in The Express Tribune, July 28^th, 2016.

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COMMENTS (14)

Sadia Salman | 8 years ago | Reply What is DC rate?

Sadia Salman | 8 years ago | Reply @Blackbuster: Can you please explain what is DC rate as I am newbie in this business. I need to know what is DC rate and how it is helping people whitening their black money. I would highly appreciate your response. Would be great If you provide me a link to learn it from. Thanks

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Sadia Salman | 8 years ago | Reply A/Salam, I'm newbie in this business, and I would highly appreciate if anyone please explain what is DC rate and how it is helping people whitening their money? If you can provide some source to learn more about it would be appreciable.

Blackbuster | 8 years ago | Reply @Rant: I agree with you on the government's culpability in the previous mechanism, and I do agree that there needs to be a mechanism to ensure that people are not hit by unfairly high CGT by simply taking the difference between the previous DC purchase price and today's market price as Capital Gains. This can be done either through a regularising scheme (there was a proposal for amnesty by paying 5% to regularise the values of their property), or by reducing the rate of CGT from the proposed rate of 10%. All those ideas make sense to me. However, there is absolutely no economic or moral justification to not declare the sale at the current market value, The DC mechanism allows for the free inflow of black money as the Raisanis of the world can declare their 6 crore phase 8 plot to be purchase for 1 million. Not only should sales be declared at their real value, FBR should also be empowered to inquire about the source of funds. ANyone with legitimate funds (including overseas Pakistanis) should have no qualms about that. Equally, if overseas Pakistanis are investing and earning from the real estate sector, they should pay an appropriate amount of tax rather than the current ludicrous amount of stamp duty on DC valued transactions. You can't take income from the country without paying taxes. If this is not acceptable, please do not invest in the country. We have enough free-riders as it is.

Muhammad Iqbal | 8 years ago | Reply People are confused all over the country as what’s happening in Karachi about properties, DC rates, role of SBP valuers and amenesty. It has been more than a week that deliberations between government, builders and and real estate sector is going on but yet there is no clear cut citywide formula is announced as yet. I know one thing for sure and that is the new taxation policy is going to hit the local market and it’s after affects will be seen as long as two years during which flight of capital will takes place to other countries, if not in Dubai and Ajman, but to UK as prices of properties have drastically gone down.

Rant | 8 years ago | Reply @Blackbuster: You have no idea what you are talking about. It is the dc rate set by the government for decades which has turned white money into black money. This black economy has been made into black by the government so why should the poor foreign investor or local investor be penalised on the governments mistake. Most commentators want the market to crash just so that they can buy a plot for cheap however these people can never buy a plot without mortgage no matter how low it drops. Perfect example of if my house burned let the whole world burn also. Amnesty has to be given as the government made this mistake for decades and turned people's white money into black so why penalise the investor.

Shakir Lakhani | 8 years ago | Reply IN DHA Ph 8 (Karachi), the DC value is Rs. 1,650 per square yard, while the actual value is Rs. 155,000 per square yard, This means that the black money holders were paying tax only on one percent of the real value. This has been going on for many years now. The government should not provide amnesty, it should collect tax @ 30% from tax evaders in those cases where the actual value was more than ten times the DC value.

Jamal | 8 years ago | Reply As far as I can see, and I may be wrong as I'm no expert in this, government's plan here is to: a) milk property market as much as possible b) and as aftermath, make properties so expensive and out of reach of general public that they get into the mortgage culture (common abroad) and become slaves to the banks. win-win for the government and corporations.

Salman | 8 years ago | Reply A market survey and 20 mins surfing on zameen[dot]com can quickly give them nearly accurate idea about the price of the property around Pakistan. But Patwaris won't do it. rather they will hire a consultancy service and pay millions to know whether the prices are same or not?

Blackbuster | 8 years ago | Reply The proposal given by real estate agents to increase DC rates by 70% is a joke, and it would be funny if it wasn't for the fact that it is intended solely to allow black money to flourish in this sector. The government sees it fit to carry out negotiations with the people who have been the cause of black money dominating the market, but doesn't see it fit to take into account the views of tens of thousands of taxpayers who were looking at the new legislation to fix the market, The PM's Adviser is probably correct in his assessment that the gap between DC rates and market is the greatest in Karachi, and that is why the Karachi market has been seeing illogical price rises over the past few years, as this is the greatest sinkhole for black money. However, his assessment of the gap is understated. A 500 sq yard plot in DHA Phase 8 is worth about 16 lakhs at DC values, and currently trading in the market at about Rs. 6 crore. That is about 40 times the DC value. I'm puzzled by the government's intention to bring DC rates to 50% of market rates also puzzles me. What is the moral and economic justification for allowing prices to be understated on legal documentation? The only benefit of this is to tax-evaders and black money holders who can show their wealth at less than real value. In other markets, people go to jail for doing this. I also hope that the values are set close to actual market rates, and that FBR is also empowered to subsequently ask people about the source of funds. If this starts to happen, watch the black money disappear from the market.

Affan | 8 years ago | Reply i want to buy property on real estate representative fair market value is there any seller among them

Amr | 8 years ago | Reply I agree with Haider. I doubt If the stakeholders have the required knowledge to deal with it properly. Increase the DC rates gradually and force the buyers/sellers to file tax is the only solution.

Haider | 8 years ago | Reply Someone forgot to mention DHA Lahore in the above context. More specifically, commercial properties prices in the 2016 Lahore Ballot ( which were around 30% less than the prevailing market rates) were still 20-30 times less than the DC rates. The rationale behind any government policy should be to curb speculation of property and not the tax revenue from property sector only. Any real economic growth requires increase in production and consumption of resources instead of speculation of existing resources.

Syed A. Mateen | 8 years ago | Reply People are confused all over the country as what's happening in Islamabad about properties, DC rates, role of SBP valuers and amenesty. It has been more than a week that deliberations between government, builders and and real estate sector is going on but yet there is no clear cut citywide formula is announced as yet. I know one thing for sure and that is the new taxation policy is going to hit the local market and it's after affects will be seen as long as two years during which flight of capital will takes place to other countries, if not in Dubai and Ajman, but to UK as prices of properties have drastically gone down over there after Brexit.

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