PBC opposes tax relief for real estate

ISLAMABAD:

As the government finalises proposals to reduce taxes on the realty sector, the Pakistan Business Council (PBC) on Friday urged Prime Minister Shehbaz Sharif not to facilitate the sector that is a major source of black money.

In a letter to the PM, the PBC, while acknowledging his government's efforts to stabilise economy, recommended not to change tax policies for real estate. It, however, supported facilitation for construction business, which is relatively formal in nature and is essential for meeting the country's housing requirement.

Referring to a meeting with the Federal Board of Revenue (FBR) chairman, the PBC stated that Rashid Langrial hinted at lowering taxes for the real estate sector to boost its business.

The FBR chairman was quoted as saying that "undeveloped land, ie, trading in plots, was suffering from high transaction costs and the government was reviewing these".

"So does most of the formal sector from 18% GST, which we want to remind. Therefore, we recommend attempts should continue to unearth black money locked in plots and create a level playing field with the formal sector," the PBC said.

The letter was written a day after a PBC delegation met the PM and acknowledged the return of economic stability. PBC members generate 40% of total exports and contribute a third of direct taxes.

PM Sharif has constituted a task force for housing sector development and its taxation committee has finalised proposals for reducing tax burden on the real estate sector.

There is a proposal to reduce withholding taxes on sellers and buyers of plots. There is also a proposal to abolish an unjust 3% federal excise duty (FED) on plots and residential homes. The FBR is also illegally charging 3% FED even on residential homes that have been sold more than once. The law limits the levy to only first sale by a builder and developer.

There is also a proposal to exempt up to Rs10 million worth of properties from disclosing the source of resources. Last year, out of the total 1.7 million property transactions registered with any authority, nearly 1.6 million, or 94%, were valued at less than Rs10 million.

The PBC wrote that economic stability should not be compromised by prematurely triggering growth before fundamental flaws were addressed through reforms.

IMF's Resident Representative to Pakistan Mahir Binici said this week that Pakistan should show patience to stay on course and should not abandon the path of economic stability.

The PBC said that Pakistan has had a sad experience on multiple occasions when import-led demand caused an imbalance in external account, resulting in repeated recourse to the IMF. PBC members and others in the formal sector have contributed disproportionately to help achieve the stretching tax revenue targets, it added.

The representative body of manufacturers also said that the government's recent decision to increase gas prices by 17% for captive power plants – the in-house power generation facilities of industries – would make it harder to achieve the PM's goal of increasing exports to $60 billion in three years.

"Impeding this ($60 billion) admirable objective is regionally uncompetitive energy cost, higher taxation and the cash flow burden from withholding taxes," it wrote.

The council added that the recent increase in the cost of gas for captive plants would not help, recommending comprehensive benchmarking of export incentives with regional competitors.

It again demanded the renegotiation of China-Pakistan Free Trade Agreement, which was heavily tilted towards Beijing.

The PBC said that tax-to-GDP ratio should be increased through promoting business and investment growth by directing it towards exports and indigenisation, encouraging formalisation, corporatisation and listing of companies, and broadening the tax base to include the untaxed and under-taxed sectors.

If the target of higher tax-to-GDP ratio was attempted by taxing the already taxed, like the current budget, then it would do the opposite of encouraging the growth of business, it added.

The manufacturers also demanded an end to the dividend income tax, which was tantamount to double taxation.

The PBC has consistently opposed unconditional and indefinite tariff protection for sectors where Pakistan has no comparative advantage; production facilities are dated and inefficient; there is a low likelihood of gaining competitive scale; it is impossible to offer domestic consumers value comparable to imports or provide input at a competitive cost for exporters.

However, given the high cost of doing business and Pakistan's poor infrastructure, there was a good case for providing limited protection to offset the high cost to sectors that relied mainly on indigenous inputs, the PBC said.

It also highlighted the import of raw materials by exporters after the government imposed 18% sales tax on local supplies in the budget.