Tuesday April 16, 2024

Proposal to abandon DC, FBR rates for real estate transactions

Pakistan Institute of Development Economics (PIDE), has recommended eliminating both DC and FBR notified rates and coming up with an auction market

By Mehtab Haider
October 27, 2023
A residential area in a housing society can be seen in this picture. — AFP/File
A residential area in a housing society can be seen in this picture. — AFP/File

ISLAMABAD: Highlighting massive gaps in the valuation rates of properties, the Planning Commission’s think tank, Pakistan Institute of Development Economics (PIDE), has recommended eliminating both DC and FBR notified rates and coming up with an auction market.

The market rate (the actual rate at which transactions are happening in the real estate market) is roughly 5 to 10 times higher than the DC rate and 2 to 4 times higher than the FBR rate.

It is recommended to sell properties by advertising on a portal and anyone will be authorised to buy on 10 percent higher than the bid price of the contract shown on the online portal.

The solution to this problem of different valuation rates is to set up a proper market for real estate. One possible solution is the introduction of multiple listing services that allow auctions. The Managing Authority of the portal will issue a certificate of the contract conditional to the submission of advance by consensus of both parties. Transfer of the property will not happen without this certificate.

Currently, at least three property rates are operational in the market, and that includes the Federal Board of Revenue (FBR) immovable property valuation, the District Collector (DC) rate, and the market rates. The existence of multiple rates in the real estate market is due to revenue considerations. Although, the actual transaction happens at the market rate, the recorded price is primarily determined by the government DC rate in line with what the government expects.

Provincial governments use the District Collector (DC) rate to calculate the stamp duty and Capital Value Tax (CVT). The Section 27-A of the Stamp Act (1899) states that the duty on the immovable property shall be charged according to the value of the property, and for the valuation of the property DC notified value table/rate shall be used.

The district collector announces the valuation of properties based on the characteristics of properties that include the location (district, tehsil), type (urban, rural), and nature (the classification of land) of the property. The practice of applying the DC rate at the time of mutation was formally adopted during the 1980s with the following objectives: i. To make the sector more efficient ii. To maximise the tax revenue iii. To control price fall.

Afterward, the stamp duty and CVT, which fall under the provincial jurisdictions, are calculated based on DC rates at the time of mutation. Initially, the federal government also adopted DC rates to calculate both capital gain and withholding taxes. However, in the Income Tax Ordinance 2001, the power to determine the property price was given to the commissioner. The Income Tax Rules 2002 also prescribed the mechanism for the commissioner to determine the fair market price.

To tackle the valuation gap between the DC rate and the market rate, the FBR started the practice of issuing the valuation of immovable property for different cities in Pakistan in 2016. These valuation tables are meant to be at par with the market rate, and the FBR has revised these tables two times, i.e., in 2019 and 2022, so far. Now the capital gain tax and withholding tax on the sale of immovable property are calculated based on FBR immovable property tables in localities where the tables are notified, while for all other localities the DC rate is still applicable.

The 20th-century experiments with price controls and socialism found to their regret that market rates fluctuate substantially, and administrators are incapable of setting such prices with any level of accuracy.

Large amounts of evidence are available on this issue. Sadly, we continue to set prices for real estate to confuse both policy and the market. The market’s rate differs widely from both the FBR valuation and the DC rates. The outline of this approach is as follows: 1. Eliminate DC rates and the FBR valuation tables. 2. All properties to be sold must be advertised on a portal for all to see. 3. Once a contract has been settled, it must be listed on the exchange for at least 2 weeks — called the contract period — before the transfer can take place. Authorities must by law require that all contracts be revealed on the exchange for 2 weeks for transfers to be affected.

The contract of the sale must be disclosed. Details must a. Price of the sale. b. The deposit placed on the sale c. The time when the deal will be closed d. The deposit for sale will be placed in escrow to be surrendered in case of default.

4. The contract period will allow an auction market to happen. a. Any buyer can outbid and claim the contract on the following conditions: b. The bid price must be at least 10 percent higher than the previous bid but on the same or better terms than the previous bid; and ii. With a deposit of 2 times that of the previous bid unless the full price is paid upfront iii. The deposit will be placed in escrow and forfeited in case of default. c. The settlement date can only be shortened not extended.

Legal transfer by the local authorities will only happen once these conditions have been certified by the managers of the portal. Transfer of property to a family member through gift or transfer of property through inheritance may be exempted from this mechanism. 6. Prior registration at the forum/portal along with necessary information is required.