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January 14, 2018

Valuation U-turn


January 14, 2018

A surprising U-turn by the Federal Board of Revenue can be explained by nothing other than a desire to help wealthy individuals evade taxation. In October 2016, the FBR had substantially increased its valuation of properties in major cities around the country to more accurately reflect market realities and ensure property taxes aren’t evaded. The valuation increases were to be gradually implemented in phases, with the second phase meant to be implemented from July 2017 onwards. It has now walked back much of that increase in Karachi, Lahore, Islamabad, Rawalpindi, Peshawar and Faisalabad. Back in 2016, the FBR had also offered an amnesty scheme to allow untaxed properties to be legalised. That was meant to be the carrot along with the stick of the valuation increase but, as happens all too often, tax dodgers have now been given the best of both worlds. The brazenness of what the FBR has done can be seen in the fact that its largest downward revisals are in the highest-end markets of the cities. The original valuations were for 21 cities but the six cities that have now been spared most of the increase tend to be those where the wealthiest and most politically-connected individuals tend to reside and hold property.

Real estate in Pakistan has long been a conduit for money laundering and tax evasion. It is routine for high net-worth individuals to pay a nominal sum for a property on paper with the balance paid in black cash. The entire purpose of setting valuation rates which corresponded to real-market rates was to stamp out this practice. The FBR has now given carte blanche for mass tax fraud. The powerful real estate agent lobby had been opposed to the original move because it was scared that business would be lost as real estate became a less attractive money laundering option for the wealthy. That there was always the intention of walking the increase back can be seen by the way both the valuation increase and the tax amnesty scheme were designed. By increasing property valuations in stages back in 2016, the stage was set for reversing it at a later date when few would be paying attention – as indeed has happened now. The amnesty was also controversial since it never asked those who availed it to explain the source of their money to find out if it had been earned through illegal means. With this latest step, the government seems to have given the indication that it may never have been serious about taking on the challenge of criminal goings-on in the property sector.

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