The investment in real estate in Pakistan and its taxation has once again become a subject of interest, debate and controversy. It is a fact that the lucrative investments/gains in this sector, like speculative transactions at stock exchange, has been the most attractive shelter for black money in Pakistan as well as generating further unprecedented untaxed profits.

The big fish milking profits in these two sectors will remain unaffected even after amendments through the Finance Act, 2016, courtesy the permanent immunity available under section 111(4) of the Income Tax Ordinance, 2001. The determination of market value of property by any of the 59 firms notified by the State Bank of Pakistan (SB)) may hurt the small and genuine buyers and sellers but not the big players in this business.

There are many lacunae, loopholes and shortcomings in the law -- poorly drafted by unskilled bureaucrats sitting in the Federal Board of Revenue (FBR) -- relating to taxation of capital gain arising on disposal of immovable property that could be exploited by unscrupulous elements without or with the connivance of valuers/officials. Besides, the constitutionality of taxing gain of immovable property, urban and rural, by the federal government, is also questionable.

According to a report in The News, the FBR is of the view that valuation through SBP’s notified panels, aimed at taxing/countering black money as 75 per cent transactions in real estate sector are understated, will yield huge revenues. Businessmen, opposing the move, are alleging that new "doors for corruption have been opened." Their argument is that the amendment amounts to transgressing the right of provinces to tax gain on immovable property and notify ‘valuation tables’ for registration of the same.

Section 68 of the Income Tax Ordinance, 2001, as amended by Finance Act, 2016, reads as under:

68. Fair market value.- (1) For the purposes of this Ordinance, the fair market value of any property or rent, asset, service, benefit or perquisite at a particular time shall be the price which the property or rent, asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the open market at that time.

(2) The fair market value of any property or rent, asset, service, benefit or perquisite shall be determined without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash.

(3) Where the price other than the price of immovable property referred to in sub-section (1) is not ordinarily ascertainable, such price may be determined by the Commissioner.

(4) Notwithstanding anything contained in sub-sections (1) and (3), the fair market value of immovable property shall be determined on the basis of valuation made by a panel of approved valuers of the State Bank of Pakistan.

The above amendment juxtaposed with others provisions, amended this year, provides that from tax year 2017 onwards, gain arising out of disposal of immovable property within 5 years of its purchase, will be taxed. The term ‘immovable property’ also includes agriculture lands! The gain on sale will be: market value minus cost. This means one is penalised for earning windfall gains if he is not engaged in property business. As regards sale and purchase of properties on regular basis or as adventure in the nature of trade, the same is already treated as regular business taxable under section 18 read with section 2(10) and not as capital gain under section 37 of the Income Tax ordinance, 2001.

In Finance Act 2016, those engaged in the business of construction and sale of residential, commercial or other buildings property have been favoured by the FBR as they can now pass on their entire tax burden to their customers. They will pay fixed tax (charged to customers) and no tax on their real profits. Is this prudent taxation? Not at all. In fact, those engaged in the business of construction and sale of residential, commercial or other buildings have been "accommodated", while genuine investors penalised. The unscrupulous ones will get "desired valuation" and arrange funds accordingly through fake remittances paying a premium of 2 to 3 per cent to exchange dealers. Against them no action under section 68 and/or section 111 of the Income Tax Ordinance, 2001 would be possible.

Withholding tax on purchase and sale of immovable property at market rate and then taxation of capital gain on disposal, as elaborated above, is not aimed at countering black money as claimed by the FBR. Rather, it will help the property dealers/developer mafia. It will make near to impossible for a majority of Pakistanis to dream for a decent living.

For the unscrupulous elements, doors of whitening money have been kept wide open. They can get their untaxed funds whitened through section 111(4) of the Income Tax Ordinance, 2001 which says that no action can be taken in respect of "any amount of foreign exchange remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect". This is why every year foreign remittances are increasing even though job markets for our workers abroad are rapidly shrinking while expatriates are also under stricter scrutiny to send money!

The levy of income tax on gain on disposal of urban and rural immovable property by the federal government is also unconstitutional. Through Finance Act 2012, section 37(5) of the Income Tax Ordinance, 2001 was amended to impose income tax on gain of immovable property. Interestingly, the Punjab Assembly also levied tax on gain of immovable property through Punjab Finance Act 2013. Obviously, one of them is violating Article 142 of the Constitution of Pakistan. Both the national and the provincial assembles cannot use item No 50 of the Federal Legislative List, Fourth Schedule to the 1973 Constitution, to levy tax on gain of immovable property. The federal government can levy taxes on matters enumerated in the federal legislative list and residual matters fall in the domain of the provinces.

After the Eighteenth Constitutional Amendment, article 50 reads as: "Taxes on the capital value of the assets, not including taxes on immovable property". Prior to amendment, its wording was: "Taxes on the capital value of the assets, not including taxes on capital gains on immovable property."

From the plain reading of Entry 50, as it stands after the amendment, it is unambiguous that the National Assembly can levy taxes on capital value of moveable assets but has no authority to levy taxes, including capital gain tax, on immovable property.

The omission of words "capital gain" from Entry 50 does not extend jurisdiction to the federal government to impose income tax on gain of immovable property. The phrase "not including taxes on immovable property" cannot be read to "include taxes on capital gains on immovable property." Provinces have exclusive right to tax gain on immovable property situated within their territories and Punjab Assembly rightly exercised its constitutional right in 2013.

In the wake of Eighteenth Constitutional Amendment, the federal government cannot levy any kind of tax on immovable property. Unfortunately, the National Assembly passed an unconstitutional law to this effect in 2012 and has made further amendments in it through Finance Act, 2016. This proves that our parliamentarians act as mere rubber-stamps for tax bureaucrats who "brief" (in fact dictate) them to easily get even unconstitutional laws passed! This badly reflects on the competence of the entire House -- none from the opposition raised any objection in Senate or National Assembly to this unconstitutional levy by the federal government.

The remedy for the government is now to ask National Assembly to repeal this weird imposition or brace itself for a challenge under Article 199 of the Constitution.