Property valuation disparity magnets ill-gotten investment

KARACHI: Real estate sector is a safe haven for the ill-gotten investment because of the charm of a wide disparity between the values determined by the tax authorities for levying taxes and the actual market rates, experts said on Saturday.

The Federal Board of Revenue (FBR) recently initiated a drive to revise up the property values. 

The experts said at some places provincial values of properties are only 10 percent of the values defined by the FBR.

A leading tax consultant said a residential plot of 500 square yards in Defence Housing Authority Phase VIII in Karachi is valued at Rs1.19 million by the provincial authority as against Rs10 million determined by the FBR. 

“The actual value still remains much lower than the fair market value of Rs45 million,” the consultant said on condition of anonymity.

The consultant added that such a whopping disparity is encouraging investment of ill-gotten money in the property business.

Tax experts said the Punjab government revised its property valuation table a year ago and the table is almost at par with the new FBR’s valuation. 

Contrarily, they added that the valuations, which were revised by the Sindh government during the current fiscal year, are much lower than the FBR values.

The Policy Research Institute of Market Economy (PRIME), a local think tank, the values of immovable property soared 103 percent during the past five years.

The PRIME, in a survey, found that property values increased 131 percent in Lahore, 126 percent in Islamabad and staggering 229 percent in Karachi.

The Sindh government changed the valuation tables for immovable property transactions after six years. It brought its collector values up 20 percent for Karachi.

The tax consultant said the provincial government has to set a fair market value since different provincial levies are charged according to this value.

The provincial authority is collecting the capital value tax, town tax, registration fee, and stamp duty on the basis of the collector rate.

However, the registrar of the provincial government is to deduct withholding tax under the Income Tax Ordinance, 2001 as per the values defined by the FBR.

The apex tax authority collected Rs750 million as capital gains tax and Rs2.16 billion as withholding tax from property buyers and Rs6.22 billion as withholding tax from sellers during the last fiscal year of 2015/16.

The withholding tax collection from banking cash withdrawal amounted to Rs28.62 billion during the last fiscal year.

Experts said massive under-declaration in the values of immovable properties, especially in plots could be gauged through the data.

Sources in FBR said the revenue body offered the Sindh government to adopt its valuation table to increase its revenue. Sources in the Sindh Board of Revenue said the offer had been rejected.

The experts said the different values of immovable properties are encouraging people to hide their undeclared wealth. 

They said there is not accurate data with the FBR about the quantum of property investment, but the conservative estimate puts it at around seven trillion, which is one-fifth of the country’s economic size of around Rs30-32 trillion.