ISLAMABAD: In a major development, the government on Friday further increased property valuation rates by an average of about 20% for 21 major cities of the country with immediate effect aimed at largely plugging a loophole that is pumping black money into the economy.
The increase under the second phase of bringing the property valuation rates closer to market values had been due since July 2017. The last Pakistan Muslim League-Nawaz (PML-N) government had twice postponed the increase, fearing backlash ahead of 2018 general elections.
The move is expected to generate an additional Rs5 billion in tax revenues in remaining five months of the current fiscal year, but it will disappoint real estate agents and traders.
The Federal Board of Revenue (FBR) on Friday night notified the new property valuation rates. It also added more areas to the existing cities aimed at broadening the coverage.
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“The rates have been increased by 20% on an average,” Dr Hamid Ateeq Sarwar, the FBR spokesman, told The Express Tribune. He said overall the property valuation rates had been increased in the range of 15% to 25%.
After the fresh increase, the property valuation rates were now closer to 60% of the actual market values, said Sarwar, who is also Inland Revenue Policy member of the FBR.
He said the third and last phase of increase in the property valuation rates would start from either July or September, which would bring the rates closer to 80% of market valuations.
The FBR did not increase the number of cities and kept it unchanged at 21 during the second phase as well. The rates have been notified with effect from February 1, 2019.
The FBR’s valuation rates are aimed at collecting federal taxes on sale and purchase of properties. There are three types of rates - deputy collector rates of provinces that are the lowest, the FBR-determined rates and actual market rates.
The difference in these rates is creating black money in the market, which can only be plugged by bringing the rates closer to market values.
The FBR collects withholding tax in the range of 1% to 4% while capital gains tax (CGT) rates are in the range of 5% to 10%.
In August 2016, the FBR notified fresh property valuation rates for 21 major cities, which provided a new base for the collection of withholding and CGT.
The FBR notified rates for major cities including Lahore, Multan, Gujranwala, Faisalabad, Sialkot, Rawalpindi, Jhang, Gujrat, Sahiwal, Bahawalpur, Islamabad, Karachi, Hyderabad, Sukkur, Sargodha, Mardan, Abbottabad, Peshawar, Quetta and Gwadar.
In 2016, the then government and realty sector representatives agreed to increase the rates, which were higher than deputy collector rates, but far lower than the prevailing market rates.
Most of the black money is parked in the real estate sector and authorities have been trying for a long time to tap this area. However, due to various lacunas, the tax collection has always remained negligible compared with the transactions and returns on them.
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The Financial Action Task Force (FATF) has also identified the real estate sector as a potential source of creating black money, which can be used for terror financing activities.
As a result of the new valuation rates, the FBR’s collection is expected to increase 15% in the remaining period of the current fiscal year to Rs20 billion. But the FBR spokesman said the rates had not been increased with the motive of enhancing revenue.
The realty market remains sluggish due to an overall slowdown in the economy and ban on the purchase of properties valuing more than Rs5 million by non-filers of income tax returns.
The PML-N government had also set up the Directorate General of Immovable Properties aimed at forcing people to declare their actual properties. The key purpose of the directorate is that if the property is declared at lower than the market rates, the FBR can bought it by paying more than 50% of the declared value of the property.
However, the directorate remains dysfunctional to date.
Sarwar said the FBR plans to make the directorate operational from the next fiscal year.
Published in The Express Tribune, February 2nd, 2019.
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