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February 15, 2018

FBR: one step forward, two steps back


February 15, 2018

Federal Board of Revenue launched “veiled amnesty” for the real estate as it reduced taxable value. This is the fourth change inserted in Finance Act 2016 for downward revision.

Since this change also involves overseas Pakistanis investment which works as growth engine, it therefore needs to analyze: 1) how property used to be taxed, 2) why government appointed the valuers of State Bank of Pakistan, 4) why it amended the law three-time a year and eventually cut down the taxable value to almost 20% of its normal value. Also will it provide any relief to genuine buyers?

Boom and rat race in the real estate started by neo-wealthy overseas Pakistanis and unchecked corrupt mafia. In a country marred with rampant poverty and lack of any social sector coverage, the birth of huge projects and sky-rocketing commercial plazas points out fault-lines in FBR policy.

This sector remains outside the tax net. A very senior executive confided that FBR’s proposal to tax used to be killed by every government since 2001 but stopped shy of naming the powerful lobby behind such blinded protection. However, another executive well conversant with budget finalisation did not find any puzzle and rather questioned, “who was not investor in real estate from the power-corridor”? One of the industrialists pointed out that how a country with per capita income of $1,600 could afford five Marla plot at a cost of Rs4 million. The price kept on sky rocketing; even touched Rs20 million for 500 square yards. A top taxpayer admitted that due to high return he diverted his investment in real estate, which, besides, is hassle-free of industries’ multifold challenges.

Initially, the deputy commissioner used to fix the value rates (DC Rates) for registering the property. Under the law, DC Rates were to be reviewed periodically but remained un-changed generally. It is relevant to point that these rates were abysmally low.

Due to IMF insistence for revenue growth, Senator Ishaq Dar, took initiative of taxing the real estate and appointed the State bank valuers which notified the value that was 60% of the normal value. It did not go well with the effective lobbies some of which are the investors of the main political parties.

The general rationale offered by investors against valuation by the State Bank was apprehension of the capital flight. They did not agree with general perception that taxing the property at normal value will decrease its prices since its true value would be declared in order to pay lesser taxes.

The law was amended within few months and commissioner was allowed to determine the fair value. Not being content with this change, they raised hue and cry; termed it discriminatory in nature. It worked well. FBR decided to notify the value itself.

This arrangement too felt short of speculators and eventually FBR has revised values in major cities, which are considered safe constituently of the ruling party and reduced it by 40% to 50%. It is quite mind-boggling when the rates notified were around 40% of original rates.

The investors should have gone in the setting up or up-grading the existing industry. But due to proportionate high reruns, the businessmen too started diverting their investments in the real estate. Even this business touched small towns.

One may know the real estate development offers limited job opportunities. It has, also, added to pollution and smog. Ugly looking huge cemented structures in place meadows and greener and grazing posture are agonising sight.

In a country trapped in a huge debt and marginal growth in large-scale industry, it hardly makes any sense to support dead investments unless there is more than what meets the eye. The current slight slump in the prices is not owing to government measures. It’s rather due to the tight control in the UAE under the directives of the OECD. The prices have also decreased and as a result money-laundering is becoming difficult. Even then laundering through “Hawala” is going unabated.

Another exporter confided that in some cases, that goods are exported at the price declared in the documents with the SBP are much lesser than the price at which the goods are exported. These exporters have own set-up abroad who remit the balance as foreign remittance which is safer way for investment as is immune from any audit or taxes. Political scientists termed the sidetracking by the FBR as the dictate of electioneering campaign.

Can this dead investment be controlled? How it could be in a country where politicking is expansive which could be financed by such speculative investors, adds a political analyst, who will remain in demand. However, few lone voices against land mafia do exist. It may also be added that land grabbing could only be tackled by the efficient state machinery and commitment to the jobs. To prove point, one genuine investor points out that DHA provides plots to its officers at very affordable prices and questioned why political government could not do this for the people who vote them to power.

Has slump in real estate affected those who are genuine buyers? One such person stated why should they be as they are the beneficiaries of any reduction in prices. Another analyst wonders why investors are taking the cause of buyers and answered himself to safeguard their investment made in this sector.

One human activist lamented the role of legislatures where four-time change in law passed by it was never questioned. He wondered perhaps such investors run electioneering or those who actively help to gain support for the election of senators.

Once state patronisation contains speculative investments, it definitely will lower the price in real estate. May a many tenants could find their own roof at affordable price. There is no denying the fact that land mafia is too strong but then nothing is infallible once people elect their representative only on merit.

The author free-lancing on fiscal economy can be reached at [email protected] and tweets as @Chafqat

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