Tax on real estate not as bad as some would have you believe

Sector's bubble needed to be given a reality check


Dr Fahd Rehman November 28, 2016
Bahria Icon Tower in Karachi's Clifton. PHOTO: AFP

LAHORE: The long boom and the bubble of the realty sector from 2011 to 2016 created a perception among people that property prices would remain sky high in years to come. People were overzealously investing and speculating in the property market regardless of its repercussions.

It is usually said that markets are self-correcting and there is no need for government intervention. Interestingly, self-correction did not take place and the government had to intervene to rein in the property speculation.

As a consequence, the much-awaited realty tax was imposed in July 2016. Much has been written about the negative repercussions of realty tax ie transactions have stopped, state revenue has decreased, capital has started to flow out of the country, overvaluation in the property tables and real estate businesses are closing down on a daily basis.

Despite all odds, the Federal Board of Revenue (FBR) reported an increase in tax collection from the realty sector. However, there are certain boons associated with the realty tax since the tax is beneficial for industrial capitalists, government and common people alike.

FBR unwilling to cut withholding tax on real estate

With a prolonged rise in property prices, the industrial capitalists turn their attention to rental incomes. They left their core business of running enterprises in an uncertain environment and started investing in real estate, which is comparatively quite safe. For instance, many large businesses started housing schemes in the country by pulling capital out of enterprises.

Furthermore, the situation also turned nascent capitalists away from enterprise development and made Pakistan a rent-seeking economy; where people derive rents out of natural resources, property and financial assets.

There is a need to transform this economy to a capitalist one to in-crease the general welfare of the people. In this transition, we have to encourage capitalists who run enterprises and tame those who extract rents.

To own a house is a dream of every common man. In Pakistan, a common man either fulfills this dream through inherited wealth or hopes to get one dose to retirement of working life.

Generally speaking, owning a home is rather easy due to higher incomes received by various income categories in developed economies. In a developing economy like Pakistan, this dream has shattered a great deal owing to persistent in-crease in property prices, which has led to discontent among the common people. Such disillusions promote short termism among the members of society, which give rise to various social problems.

The state has the ability to collect and extract taxes and Pakistani state is not an exception in this regard. Normally, the state has a policy design from high to low taxation which rests on either to discourage or encourage the sectors accordingly. As far as Pakistan's case is concerned, there is no policy design.

Enhanced property taxes: Realtors sceptical of govt’s amnesty scheme

The absence of a policy design has led the state to tax sectors from which it can collect revenue easily and this time realty sector came into grips. In a nutshell, it is evident that realty tax is beneficial for the economy. The government can ensure the masses that this tax is
here to stay. However, this tax was imposed without due diligence with the stakeholders. If the government wanted to introduce this tax, it should have debated with the stakeholders before its imposition.

Now the government is pondering to introduce an amnesty scheme and aiming to appease the lobbyists since it has started preparing for the elections. The results of previous amnesty schemes are in front of us.

On the basis of Einstein's definition of insanity; doing the same thing over and over again and expecting different results, the introduction of an amnesty scheme will be insanity.

THE WRITER IS AN ASSISTANT PROFESSOR OF ECONOMICS AT SULEMAN DAWOOD SCHOOL OF BUSINESS, LAHORE UNIVERSITY OF MANAGEMENT SCIENCES (LUMS)

COMMENTS (9)

Ahmad Hassan | 4 years ago | Reply Quite strangely stagnation in real estate sector is being touted good for economy. This sector has suffered due to stupid enforcement of taxation laws. Less collection of taxes is the result of these taxation measures. HOW COME YOU SCHOLARS ADVOCATE THIS SCENERIO.
cautious | 4 years ago | Reply In the USA real estate tax is often the backbone of the local government funding - much of it is dedicated to schools with the theory that better schools attracts people which supports higher prices including rents. So long as the taxes stay within reason it's considered a win/win situation.
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