WEB DESK: The Federal Board of Revenue (FBR) and the real estate representatives reportedly agreed upon a methodology on valuation of immovable property instead of valuation by State Bank approved valuators as approved in the Finance Act 2016.
Under the agreed method the federal government will notify city-wise multiple tables depending on the locality within the city, fair market values that would bridge the difference between the provincially notified rates and the market rates for assessment of capital gains tax. In addition, the federal government will impose a one-time tax of 2 to 5 percent for regularisation of past transactions.
It is unfortunate that the real estate sector in this country is widely used as a parking lot for ill-gotten or tax-evaded wealth that accounts for a hefty rise in real estate prices even during times when the rate of growth of the economy does not justify a rise in land prices, particularly urban land prices. Thus, black money has been used to either purchase land directly in the country or the money is routed through hawala or hundi system.
The individuals involved in the real estate sector are not engaged in the sector to cater to the housing needs of the general public and instead are rightly accused of fuelling land prices to such an extent that housing is increasingly unaffordable for the middle and even, in a significant number of cases, upper middle income earners.
The choice of real estate as an investment is premised on two major facts. First, the levy of a tax on this sector has been traditionally very low and secondly, the levy was determined by the DC valuing the land – a valuation that is common knowledge is extremely low compared to the market rates. Thus the real estate sector had become a black hole so to speak for the treasury, federal as well as provincial, and one can but support the federal government’s recent decisions in this regard with respect to budget 2016-17.
In this context, it is relevant to note that the Federal Finance Minister Ishaq Dar took two major decisions. In his budget speech on 3rd June he stated that “In order to broaden the tax base and document transactions, withholding tax is collected on sale of property and also from the purchaser of property if the value of property is more than 3 million rupees.
However, the withholding tax on sale and purchase is based on DC rates which are far lower than the actual market prices and are not revised frequently to reflect increasing property prices. It is proposed to increase the rate in case of sale of property from 0.5 percent and 1 percent to 1 percent and 2 percent for filers and non-filers, respectively, and in case of purchase of property, from 1 percent and 2 percent to 2 percent and 4 percent for filers and non-filers, respectively.” Or in other words, the rate of tax was doubled however one would doubt if this is a source of serious concern to the real estate sector if the valuation continues to be done by the DC.
What is a source of concern to the real estate sector was the second major decision taken by Dar in the budget relating to rationalising capital gains tax on immovable property: “Investment in real estate sector is a means of earning huge gains.
Our government is attempting to integrate this sector gradually into the tax system. At present, no tax is charged on capital gain from immovable property if it is sold after two years of acquisition. It is proposed that capital gain on disposal of immovable properties be taxed at a rate of 10 percent if the property is sold within five years of acquisition.”
And of still greater concern to the sector was the decision that the property would no longer be valued by the DC but by a State Bank of Pakistan approved valuer – a decision not announced in the budget speech but introduced in the form of an amendment in the Finance Bill 2016.
To conclude, one can only hope that the federal government does end the use of this black hole which is making a select number of people richer while increasing the housing woes of the majority.
And one would urge the government not to focus on an increase in revenue for the short-term but instead support policy measures that would be able to bring long-term benefits by lowering the price of real estate and bring it within reach of the majority of people.
Source: Business Recorder