Property valuations revised, but taxes yet to be reduced

People pay around a dozen federal and provincial taxes on property transfer

Salman Siddiqui February 18, 2019
People pay around a dozen federal and provincial taxes on property transfer. PHOTO: FILE

KARACHI: The real estate sector has always been targeted by the gamblers and people involved in money laundering. Transfer of property files from one investor to another on speculation that prices will shoot up has been the norm.

This has badly impacted the purchasing power of genuine buyers of houses and industrial plots.

In a bid to discourage speculative buying with the objective of making real estate viable for the genuine buyers and to close the doors to gambling and money laundering, the Pakistan government back in 2016 initiated a five-year journey to bring property values in its files to the level of prevailing market prices in phases.

Low prices in government’s property files compared to actual prices at which sale and purchase deals are executed have fuelled the undocumented economy - better known as black economy - and caused heavy revenue loss to the national exchequer.

Though property revaluation is a move in the right direction and is in line with requirements of the Financial Action Task Force (FATF), which works on making the world free from money laundering and terror financing, the 2016 decision still has some big loopholes and anomalies.

“The anomalies are promoting untaxed economy, if not black economy,” commented Pakistan Real Estate Investment Forum President Shaban Elahi while talking to The Express Tribune.

“The loopholes, at the same time, have resulted in harassment of genuine buyers at the hands of law enforcement agencies,” he said.

The Federal Board of Revenue (FBR), which has been tasked with revising upwards the property valuations, introduced a full and final tax - 236W - at the rate of 3% in 2016 to make real estate part of the documented economy.

The tax is charged on that property price which is higher than the value recorded in official files, but not more than the FBR valuation.

For instance, according to Elahi, if the price of an official property file is Rs10 million compared to FBR’s valuation of Rs60 million, while the file changes hands at the actual price of Rs100 million, the 3% tax will be charged on the difference between the file price and FBR valuation, ie Rs50 million. However, Rs40 million will still remain untaxed.

He pointed out that they had proposed to the National Assembly Standing Committee on Finance in mid-January to allow real estate buyers payment of 3% tax at the full price at which the property deal was executed instead of the difference between the file price and FBR valuation. “We are still waiting for its response,” he said.

According to an FBR official, the latest round of increase in property valuations in 21 cities of Pakistan with effect from February 1, 2019 has brought the average valuation close to 60% of market prices.

The 21 cities include Lahore, Multan, Gujranwala, Faisalabad, Sialkot, Rawalpindi, Jhang, Gujrat, Sahiwal, Bahawalpur, Islamabad, Karachi, Hyderabad, Sukkur, Sargodha, Mardan, Abbottabad, Peshawar, Quetta and Gwadar.

Tax rate cut awaited

The government back in 2016 had promised to reduce rates of taxes on the sale and purchase of properties while bringing FBR valuations to market levels to keep the cost of property transfer reasonable, he recalled. However, the promise has not yet been fulfilled.

“With the latest increase in FBR valuations, the cost of property transfer has doubled,” he claimed.

FBR increases property valuation by average 20%

There are around a dozen federal and provincial taxes on the transfer of property from one owner to another. They cumulatively come to around 15% of the property value. “So, the increase of more than 100% in FBR’s property valuations since December 2016 has simply doubled the cost of property transfer as well,” he said.

Litigation in courts

The spike in the cost of real estate purchase has pushed new buyers to acquire property on the general “Power of Attorney”, which costs 2-3% only, compared to 15% taxes on the change of ownership through proper documentation called the “Sale Deed”.

The trend is growing and it has killed one of the two objectives of the revised FBR valuations. “The tax revenue collection has dropped to one-third in the past two years compared to revenue receipts before FBR valuations were introduced in 2016,” he estimated.

Key reforms for Pakistan’s real estate sector hit a snag

Apart from this, the acquisition of property on the Power of Attorney is expected to lead to an increase in cases of property disputes in courts as sellers reserve the right to cancel the Power of Attorney any time and reclaim property.

Industrialisation discouraged

The new FBR valuations have pushed up the value of industrial plots in at least three zones in Karachi to higher than market prices. “This is discouraging industrialisation in the country,” he said.

The industrial zones include the Port Qasim Industrial Area, Sindh Memon Goth Industrial Estate and Korangi Industrial Area.

Investment drops

The new property valuation formula along with 32% depreciation in the rupee’s value against the dollar since December 2017 has pushed down investment by overseas Pakistanis in the real estate sector by around 25%.

“Overseas Pakistanis were investing around $7-8 billion a year before 2016, which constituted around 35-40% of total worker remittance flow into the country,” he revealed.

A property dealer, Yaseen Dhedhi, termed the government’s move a step in the right direction. He, however, underlined the need for devising a strategy to bring property prices in line with purchasing power of the common man.

The government has met its objective of discouraging speculative buying in many of the 21 areas where valuations have been revised.

“For instance, the transfer of files from one owner to another has decreased to a range of 50 to 100 a week in Karachi’s posh Defence Housing Authority (DHA) compared to around 300-400 earlier,” he said.

He called for introducing low-cost housing projects for people belonging to the low- and middle-income classes as it seemed difficult that real estate prices would fall back to pre-2016 valuations.

The writer is a staff correspondent

Published in The Express Tribune, February 18th, 2019.

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