Two to 10 times hike in property valuation rate

ISLAMABAD: In a major development, the government and property dealers on Saturday struck an agreement on a comprehensive package for the valuation of fair market value of property for major cities.

They range from an average of two to ten times, bringing down the holding period from five to three years for paying capital gains tax (CGT) from five to 10 percent and the imposition of a flat rate of 5 percent on land transactions made before July 1, 2016 in case of a holding period less than three years.

The government is all set to promulgate an ordinance to give legal cover to the package.

“We will give legal cover to the package in accordance with the law,” Federal Minister for Finance Ishaq Dar said after the agreement.

After several rounds of hectic negotiations among the FBR, property and FPCCI tycoons here at the FBR’s headquarters for the last four consecutive days, Dar unveiled the package for the real estate sector under which the FBR will notify new rates for evaluation of immovable properties for one year till June 30, 2017.

The period of capital gains has been reduced from the existing five years to three years on future property transactions, a special 5 percent CGT rate for past transactions and enhanced limit of withholding tax from Rs3 million to Rs4 million on buying/selling of property.

Asked about valuation rates for different cities, the minister did not reply and said the rates would be made public when the FBR notified them. 

However, sources said the valuation rate of property was increased from two times to 10 times on average on the basis of the location of cities. But in some cases, such as for phase-8 of the Defence Housing Authority (DHA) in Karachi, the valuation rate was increased to 20 times.

Regarding the revenue impact, the minister preferred to keep things fluid but the FBR high-ups said the FBR could generate Rs25-32 billion with the reform package of real estate.

“We have not agreed with anyone on an amnesty but agreed with the stakeholders to move forward. Now we will talk with the provinces for the adoption of new valuations of real estate. The new baseline devised will remain valid for one year and we will again invite real estate representatives to come and analyse rates of valuation,” Dar said.

Flanked by Special Assistant to the PM on Revenues Haroon Akhtar Khan, Chairman FBR Nisar Mohammad Khan, President FPCCI Abdur Rauf Alam and representatives of property dealers belonging to 21 cities, Dar said except a few cities, the FBR and property stakeholders had agreed on valuation rates which would now be notified by the FBR. 

Under the Finance Act 2016-17, the government had allowed the SBP valuators to fix valuation of property for different cities for the purpose of federal taxation.

The minister said the new valuation table of the FBR would be valid for computation of capital gains tax (CGT), withholding tax and section 111 of the Income Tax Ordinance 2001 dealing with the issue of unexplained income/assets.

He said the required amendments would be made to the law. He also maintained that the entire system of valuation had been made so transparent that these would benefit the country.  

“A baseline has been made,” he said, adding that the limit of withholding tax had been increased from Rs3 million to Rs4 million. He said the details of valuation would be made available through a notification and nothing unlawful would be done.

Ishaq Dar said the impact of this reform would be significant as the tax would be applicable to both the buyers and sellers. 

He said the understanding reached between the government and the real estate sector had ended fear and it was acceptable to all. 

He said on transaction of less that Rs3 million a flat rate of 5 per cent would be applicable. 

The representative of the real estate sector has also endorsed the finance minister’s view and stated that the mechanism for evaluation of properties agreed or rate is acceptable to them.

Details of the package to be announced through a presidential ordinance revealed that the government had decided to reduce the period of capital gains from the existing five years to three years on the disposal of immovable properties.

Under the Finance Act 2016, it was proposed that Capital Gain on disposal of immovable properties be taxed at a rate of 10% if the property is sold within five years of acquisition.

Now, both sides have agreed to reduce the period from five to three years. The FBR will introduce three slabs for payment of CGT on future transactions. 

It has also been decided that a flat rate of 10 percent CGT would be applicable during the first year, 7.5 percent rate during one to two years and 5 percent tax on two to three year period.

Old transactions prior to July 2016: if sold within three years period the CGT at the rate of five percent will be applicable and no CGT will be charged to be sold after a period of three years.

Under the new agreement, valuation tables will be notified by the FBR instead of valuation by the SBP approved valuers. Till such time and for those areas for which no valuation tables are notified, DC rate will apply. 

The holding period for CGT (capital gain tax) has been reduced from five to three years. There will be no CGT on property held for more than three years.

Properties acquired on or after 1st July 2016: if the holding period is up to 1 year, the CGT rate of 10% will be imposed; if holding period is between one and two years, the CGT rate will be 7.5% and if the holding period is between two and three years, the CGT will be standing at 5%. If the holding period is more than three years, there will be no CGT.

Properties acquired before 1st July 2016: if the holding period is less than three years, the CGT of 5% will be imposed and if holding period is more than three years, it will be exempted from payment of tax. 

The minister also announced that the withholding tax on banking transaction would continue at rate of 0.4 percent for August 2016 as he had granted anticipatory approval to this effect while it would be approved formally during the next ECC meeting.