Spotlight on real estate

The government has approved a tax amnesty scheme for the real estate sector, lowering its future income tax burden through what the finance minister called a “transparent deal”. The period for the Capital Gains Tax (CGT) exemption was reduced from five to three years, while properties acquired before July 1 will be subjected to a flat five per cent CGT for a holding period of less than three years. Properties acquired after July 1 will be subjected to different rates of CGT, up until three years of holding period. When asked if the government would inquire about the source of income invested in the past, Ishaq Dar said that one “should look forward”, politely dismissing the idea of authorities worrying themselves with the legality of the money.

The government has clearly retreated from its earlier stern stance, but has still managed to win a crucial battle. It got stakeholders to agree on a new property valuation method, which was the single-most important reason for the real estate sector’s minuscule contribution to tax collection. This eventually led to phenomenal growth that was not just caused by fundamentals of housing demand and supply, but also by billions in ill-gotten gains making their way into the real estate sector and pushing up prices. The potential expansion of the tax net to envelope those who have made millions, but contributed little to the national exchequer, is very welcome. The move, if implemented properly, could also be good news for other sectors that can see some of the investment in real estate being put to better use. For long, the real estate sector has been plagued by brokers who move properties around like stocks on a trading screen, making millions in the process. The tax rates should ideally curb that habit. The government has also decided to change the process by which valuations will be determined, taking it away from the hands of the SBP and handing the responsibility to the FBR. One hopes that the FBR rises above its reputation of being inefficient and corrupt, and does not get in the way of a well-intended move to raise tax collection and expand the tax net.

Published in The Express Tribune, August 2^nd, 2016.

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