PROPERTY
Never before has the real estate business come to a standstill as witnessed in the last two months, as the government showed first serious intent to document it. It also proved that the market is dominated by speculative investors, as only a few genuine buyers were left that continued to buy property.
Real estate is the most preferred avenue to park black money. The wealth is hedged against inflation as the increase in property value has always been much higher than inflation, and also covers any decline in currency value. For years the IMF and other multilateral agencies have been pressing every government to plug this avenue by properly documenting and taxing properties.
The sales and purchase of property generates handsome revenues both for the provincial and federal government. The revenues depend upon the price at which the property is sold. The buyer always tries to register the property at a low price to save the stamp duty levied on per thousand at different rates in each province. The system instituted by the state to assess fair market based value failed miserably.
The deputy commissioners in each district assess and fix the property rates in each locality of the district. This system was compromised as the rates in most of the cities were fixed low.
The government has amended Section 68 of the Income Tax Ordinance 2001 through the Finance Act 2016, became effective from July 1, 2016. Since then, the real estate sector has been slow.
The property evaluation rates set by the provincial governments were quashed under this amendment. The State Bank of Pakistan (SBP) was assigned to evaluate the actual price of the property. With this amendment the four years old bullish trend stopped abruptly. Sales and purchases of the properties almost stopped.
After almost a month, the real estate agents and the government of Pakistan started negotiations to resolve the issue. During their deliberation, even the real estate agents and developers conceded that the DC rates in most of the cities were unrealistic. It was also found that the difference between actual and market rates were less in Lahore, still the rates generally fixed in Lahore were 70 percent less than the market price.
In Islamabad, the DC rates in some localities were 10 percent less than the actual market price. The difference between market rates and government fixed prices was also very high in Karachi, but the distortion was less than that in Islamabad.
The talks between the Federal Board of Revenue (FBR) and the real estate stakeholders, has diluted the actual intent of the amendment. Under that amendment, one or more valuers of the SBP were to fix the market value of immovable property and refer it to the FBR’s in-land revenue department. That would have brought the prices to a more realistic level.
Now the stakeholders are negotiating new prices with the FBR that are lower than actual prices, but higher than the prevailing rates. They are also seeking amnesty on the taxes that were applicable on selling of plots or real estate in less than five years after purchase. They want this rule to be applied for purchases made after June 2016.
Some real estate developers are suggesting that after increase in the rates of the properties, the government should make a corresponding decrease in the stamp duty so that the taxes they pay on current rates are not increased.
Real estate developers have said the amendment in the income tax ordinance would discourage overseas investors from the sector, and warned that it might eventually depress the inflow of remittances. Government circles claim that due to this huge difference between market and documented value, the government was bearing huge losses in revenue.
They said unrealistic rates amounted to stealing of revenues of the government. The contention that it would increase the transaction cost is not true because with rationalisation of real property rates the government would now be getting the actual revenue. They pointed out that if the actual market price of a real estate is Rs10 million, the buyer always parts with the entire amount, plus the commission of the broker. The only savings they made is on government revenues by registering the price of a property at lower rates.
The amendment, if applied transparently will discourage black money from entering the sector and will open the doors to foreign direct investment (FDI) in this sector. If the government remained steadfast it will bring down real estate prices in the market for the initial period of this amendment, and in the long run will benefit the government and investors. Moreover, the Capital Gains Tax (CGT) calculation has also been revised, which was re-introduced in budget 2013-14 after almost 26 years, then rescheduled in Budget 2014-15. Currently, the government has revised both, the tax percentage and timeframe.
The CGT applied to property sold within one and 2 years time at a rate of 10 percent and five percent accordingly. That is now up to five years, while the applicable CGT is 10 percent. The CGT will be applied at one percent for filer and two percent for non-filer at the time of transaction. Previously, it was 0.5 percent for the filer and one percent for the non-filer.
Advance tax, which was imposed in the last budget, will apply on the property worth more than Rs3 million. For this, the percentage has been changed to two percent for filer from one percent, while it has been changed to four percent from two percent for non-filer.
Earlier, as per collector valuation table, most property prices were calculated and documented at a price lower than Rs3 million, but after this amendment, property prices will be assumed on real market value and most of the properties will be above the three million threshold.
The revised advance tax will be paid by the seller. It is two percent of the Collector Rate applicable on property value of Rs3 million and above for the filer, and four percent for non-filer, from one percent for filer and two percent for non-filer.
Stamp duty has also been revised and increased by 50 percent, which will be paid by the buyer on transfer documents; it was two percent of the Collector Rate of any property. Now it has been increased by 50 percent.
Registration fee paid by the buyer for the registration of documents in registrar office is applicable at one per cent of the official value declared by the collector value.
This amendment will direct unproductive investment to industry and as a result add to the Gross Domestic Product (GDP), creating job opportunities. According to an estimate, at present about Rs30,000 billion of black money is being used in the sale and purchase of property.
The writer is a staff member
