Daily Times

The State Bank of Pakistan (SBP) said an early implementation of the announced real estate sector reforms is crucial as uncertainty prevails amongst stakeholders in the property market regarding valuations, tax incidence as well as the future course of property prices.

Though, the government has established the Directorate General Immovable Properties, which will act as FBR’s specialized agency on all matters relating to the real estate. However, to make the property valuation process more transparent and effective, it is important for the provincial governments to abolish DC rates and discontinue the collection of stamp duties and other provincial levies, suggeted SBP.

The Finance Act 2018 introduced important measures to counter the under documentation in the real estate sector and to minimize instances of using the property market for avoiding tax obligations.

These included imposition of ban on non-filers on purchasing property above Rs 5 million; legal proceedings against any property transactions and exchanges that are deemed to be understated for the purpose of either concealment of the source of income and/or tax avoidance; and vesting power with the government to purchase the property in question in case the understatement is proven.

The SBP believes that there is an immense potential in these measures for improving revenue mobilization, all the while adjusting the incentive structure to provide a level playing field for other investment avenues.

Since revenue mobilization from immovable property is a provincial subject post 18th amendment, there is little that the federal government alone can do to address the prevailing distortions.

The Central Bank, in its special report on real estate sector, suggests the federal government to take all the provinces on board before reforms can be implemented.

Both, the Federal and provincial governments have not been able to mobilize revenues from valuation tables introduced for the collection of capital gain tax and withholding tax on property dealings because of significant difference in DC rates and actual valuations.

Anecdotal evidence suggests a subdued activity recently as transactions have reportedly been put on hold – especially until the interested individuals do not register as filers. Similarly, some prospective sellers might just be extending the property holding period to reduce the burden of capital gain tax.

Between April and September 2018, according to the SBP, plot prices in Karachi have dropped by around 15 percent, whereas the same in Lahore have nearly stagnated. In the near term, therefore, tax collection might remain subdued due to a lower transaction volume, but in the medium to long term, these reforms would improve both the revenue collection as well as the overall incentive structure.

“The simplification of tax collection by introducing a one-stage charge is of particular importance, as it holds the potential to increase government revenues by reducing the cost and time of paying taxes for the general public and nudging them towards filing returns”.

Published in Daily Times, February 2^nd 2019.