Daily Times

In a nutshell, the government’s move to determine capital gains on sale of immovable property at market value is laudable, and definitely, undoubtedly, a step in the right direction. Irrespective of all the arguments against, and doomsday predictions pursuant to this decision being floated around by those severely impacted by this decision, the system should not have ever been supporting black money to the detriment of white money in the first place. Kudos to the finance team for getting this game-changing legislation past the ruling elite, who probably did not understand the implications of a seemingly innocuous looking amendment in the income tax laws. One hopes that the finance team can stick to its guns, and not buckle under pressure — which will come in spades — to rescind this legislation.

In terms of criticism levelled against this innocent amendment in law, the one relating to federal government taxing immovable property being ultra vires to the constitution probably has some merit. While not being a lawyer, the argument that the federal government does not have jurisdiction over taxing immovable property, including capital gains thereon, irrespective of the lacuna in the language, appears to invoke reasonable doubt sufficient for those affected to refer this matter to courts. And we all know based on history that the courts can take decades to decide. Hopefully, in such a scenario, government will at least choose to press ahead with determination of market value, and challenge tax-concealed sources of wealth even if it cannot recover any tax on relating transactions. In any case, while the Federal Board of Revenue (FBR) estimates that trillions are invested in the property market, after this legislation the prices are going to come crashing down, which will obviously also adversely impact FBR’s budget estimate from this sector. Already, as per news, property prices have gone down by around 30 percent in Karachi alone, and the wind has gone out of the number of daily transactions in the market.

The second genuine concern is perhaps in the case of those who were not playing the market for profits, speculative or otherwise, being impacted by the vagaries of this amendment. Note that till now the system forced genuine buyers with available white money to be corrupt and register on DCO rates. It would now be unfair to punish them for no fault of their own. Hypothetically, for a genuine buyer selling immovable property after holding it for some years, the cost, DCO rate of that time, might even be marginal, which could result in heavy capital gains today, and consequently, an arguably unfair amount of tax burden. In order to avoid a mass protest, and perhaps political repercussions — since voters quickly shift loyalties when policies pinch their own pocket — the one concession that government might just consider is this time frame, or alternatively, allow actual cost where it can be proved that the acquirer, at least in his own wealth, disclosed the true cost of purchase.

As is, genuine property owners will be suffering a significant, if not a huge, decline in their wealth, with the property market crashing after black money finds other havens. This decline will, consequently, significantly impact their respective perceptions of wealth, and if on top they end up paying an inordinate amount of tax, their consumable income will suffer a death blow. A decline in consumption, other than bringing hardships to those affected, will also have an adverse impact on the real economy.

Admittedly, this is a brave move fraught with serious implications, and if one was to categorise related risks, flight of capital perhaps is the foremost, and which can have fatal implications including a serious depreciation of rupee and decline in foreign exchange reserves. But at any point of time if the black economy was ever to be nudged towards the white side, this risk was imminent. There can be an argument of providing an amnesty in some form or the other for the trillions of rupees of black money invested in the property market, but that would be extremely unfair to the honest populace. Except as mentioned earlier, some form of relief needs to be allowed for buyers who were forced to be corrupt by the system. The only amnesty one can generally subscribe to is the one designed to encourage the informal manufacturing sector of the economy to the white side.

On the other hand, in a shrinking flat world flying capital will have limited landing options. With the ever-vigilant FIA and NAB, exporting money from Pakistan, especially trillions of rupees, is no more a walk in the park. Additionally, after the Panama leaks and the Dubai leaks, as well as the presence of continuing terror threats globally, there are probably limited tax havens that will accept this kind of investment with no questions asked. Irrespective of these pros and cons, from the legislation alone, it would appear that government has decided to face the odds, so fingers crossed.

In fact, in all fairness, government has a duty to care for those of its subjects who never invested abroad illegally, and were not drawn by superlative profits of the black side. Accordingly, the legal loophole of bringing in money through remittances with no questions asked needs to be done away with also, or at the minimum taxed; section 111(4) of the Income Tax Ordinance needs to be suitably amended. In order to protect genuine labour from the proposed mischief, government might consider levying taxes on remittances above a monthly amount, which broadly coincides with labour wages earned by Pakistanis struggling abroad for their families in Pakistan. Suffice to say that such an initiative might even have an impact on corrupt practices.

Finally, since the government appears to be moving in the right policy direction as far as property market is concerned, there is need for another drastic action. The practice of decades spent in resolving property disputes through the diwani courts needs to be stopped. Perhaps a legislation limiting the time frame for resolution of diwani cases with a concurrent increase in number of courts and judges is the need of the hour. Admittedly, legal experts may be the right forum to suggest the right solution to the problem, but whatever the remedy, the ailment needs to be treated urgently. Formalisation of property rights and protection thereof will release a humongous amount of capital, definitely sufficient to absorb the excess liquidity available, and will spur economic growth. Identifiable property rights coupled with enforceable property contracts will encourage banks to accept all properties as collateral, which will facilitate a new breed of entrepreneurs to invest in new ventures, which is the need of the hour.

In conclusion, there can be no argument to have policies that nurture or facilitate black money; today or tomorrow the bitter medicine will have to be swallowed. The one, and perhaps very welcome, outcome of this legislation can be that property prices might even come down to affordable levels for the middle and poor class. It is heartening that government is moving in this direction, and one hopes that this initiative is taken to its logical conclusion. Standing ovation!

The writer is a chartered accountant based in Islamabad, and can be reached at syed.bakhtiyarkazmi@gmail.com