Tax Reforms 2018 Complete Details - Real Estate market

[LRE-Azan]

In 2016 the previous federal Government lead by Mr, Nawaz Shareef and finance minister Mr, Ishaq Dar levied extra taxes on the property. The justification given by Mr, Ishaq Dar for levying heavy taxes on real estate are :

• To push investors to put their money in other productive areas and industries to create more employment opportunities.
• To deter parking black money in real estate sector.
• Higher taxes will ensure that Govt will generate better revenues and be able to receive taxes off the black money as well.
• Makes sense ? sounds more like a crack down on one of the biggest sector offering employment only second to agriculture to create more unemployment.

Real Estate Supports 250 Industries & Employment

Real estate market is crucial for promoting commerce, industry, growth, employment, and poverty reduction. Real estate forms the backbone of the modern economy being considered a secure fixed asset market.It is the second-largest employment-generating sector after agriculture. Growing at a rate of about 20% per annum and this sector has been a major contributor to GDP in Pakistan.

Not only does it generate a high level of direct employment, but it also stimulates the demand in over 250 ancillary industries including construction industries such as cement, steel, cable, brick manufacturing & building materials e.t.c. Brokerage services including property managers, etc. Financial Services including mortgage banks, real estate investment trusts (REITs). Operations sector including architects, urban planners, etc. The labor sector and utility sector to include household appliances and furniture industries.

Real estate is perhaps the only sector which brings all these diverse factors together, and is, therefore, critical for the overall health of the nation, as it impacts the entire economy.

Why in the world would you want to deter employment in one sector and force investors in other sectors which are risky, underdeveloped and in need of major reforms?

Collective Punishment Demoralizes Society

Deterring black money investments in real estate is valid but punishing those who pay taxes is unacceptable as well. This speaks of incompetency where Government took an easy way out from the situation and rather than developing a system to control black money, they focused on generating higher revenues through hook or crook and formulated a collective punishment for the society.

Higher Taxes Does Not Mean Higher Revenues

Buying property is not some thing that happens in a fixed amount and thus, higher taxes do not amount to higher revenues if the number of transactions decrease. A strong real estate market actually provides more revenue through number of increased and regular transactions.

The Solution
The efficient Real Estate market is most important for a well-functioning modern economy. An efficient Real Estate market is one that encourages quick development and transaction of land, provides reasonable access to all income groups, environmentally sound and the system governing the land markets should be integrated with other laws and regulations governing land, such as planning, taxation and provision of public infrastructure and services. According to the World Bank, in most countries, real estate (including land) accounts for between half and three-quarters of national wealth.

Fair Market Valuation
Fair market valuation must be enforced and applied on all transactions and DC values must be abolished forthwith. It is much easier to determine these fair market valuations in the presence of online real estate portals where average prices in a certain area can easily be determined.

In addition a single private assessment company should be hired to provide average real market valuations to FBR every quarter or six months and update it online through an easy to use search form.

Commercial and residential property should be evaluated differently.

Differentiating between Filers, Expats, Non Tax Filers and Black Money
It is important to distinguish between all four and establishing different slabs for them. In Pakistan where systems are not mature and a high level of illiteracy exist, we need to give people some time to adopt and levy indirect taxes. However at the same time we must ensure that indirect taxes do not effect the tax payers and expats.

A non tax filer has not necessarily raised money through corruption and therefore comes into tax net by paying higher tax on the property he buys or sells.

Advance Tax Waiver for Expats
Expats pay taxes in the countries they work and live, levying them advance income tax when they are not generating money in Pakistan is unjust. This step will help bring FDI into Pakistan and will promote expats to invest in Pakistan. However the transactions must be done on fair market value.

These transactions must be concluded through banks and a certificate from bank in that effect must be presented to the competent transfer authority.

Expats Should Pay CGT
While expats can enjoy waiver on advance tax they must pay CGT as that is the profit they have generated in Pakistan. This CGT should be levied on the fair market value and if there is no increase in Capital there should be no CGT.

Allow Non Tax Filers to Purchase
Allowing non tax filers to purchase land is important as long as they have not held any govt office or a political office in the past or hold it presently. The main logic behind this is reluctance of people to register as Tax filers because of lack of education, resources and mistrust on the government institutions.

However, the Government should charge them taxes as discussed in the variable tax system described for non filers.

Variable Tax System for Filers/ Expats and Non Filers

1. While filers and expats can enjoy transactions on fair market value and pay 1% advance tax (Waiver for expats is applicable) and 1% stamp duty.
2. Non Tax filers in Pakistan should only conclude transaction after paying 3% non-refundable advance tax and 3% stamp duty as per determined fair market valuations.

These taxes on non filers can be raised after every year by 1% till it reaches 5% advance tax and 5% stamp duty.

Tax System for Govt Employees and Office Holders
To deter corruption all government/semi-government employees, counselors, political office holders and there spouses/children should only be allowed to purchase land as per fair market valuations as tax filers.

Advance Tax Waiver for Filers Below Value of 10 Million
Filers should be given an advance tax waiver upto 10 Million for one property purchased for the purpose of building a house. Any other properties purchased should be taxed regularly. This waiver should only be applicable in areas which are developed and are readily available for construction purpose. In addition the buyer should not already have a house or any other residential property in his name.

A declaration to this effect should be deposited to the transfer authority by the buyer.

Advance Tax Waiver for Non filers Below Value of 5 Million
Non tax filers should be given an advance tax waiver upto 5 Million for purchase of one property purchased for the purpose of building a house. Any other properties purchased should be taxed regularly. This waiver should only be applicable in areas which are developed and are readily available for construction purpose. In addition the buyer should not already have a house or any other residential property in his name.

A declaration to this effect should be deposited to the transfer authority by the buyer.

Discrepancy in Residential and Commercial Evaluation
There exists a huge discrepancy in evaluation of commercial properties and in reality it is the commercial property which is the real dump for black money. In reality a 4 Marla commercial in DHA Lahore Phase 6 MB has an average price of 6 crores , however the DC value of this 4 Marla plot is only 46 Lacs.

Residential property is a necessity where as commercial property is usually an investment and therefore should not be subject to any waivers.

Higher Tax Slabs for Investment Properties
Any second property purchased for the purpose of investment should be taxed regularly and advance tax waiver should not be applicable even if the property is below 10 or 5 Million for filer and non tax filer respectively.

Advance tax waiver for expats should be kept intact to reinforce FDI.

Higher Tax Slab for Luxury Properties
Residential plots up to 1 Kanal should be charged taxes regularly however Government can consider adding additional 0.5% for between 1 to 2 Kanals and 1% tax on fair market value for properties of 2 Kanal and above.

Advantages of The Solution
The above solution offers relief to the deserving tax filers and expats for example if we consider 2 crore as average fair market value of 1 Kanal plot in Phase 6 than an expat will only pay 2 Lacs and a tax filer will pay 4 Lacs instead of 6.5 Lacs approx as of today.

1. The non tax filer will however pay 12 Lacs instead of 8 Lacs approx on a property worth 2 crores as per fair market value.
2. The biggest gain in revenues will be from commercial properties where a property valued at 10 crores will give 10 , 20 and 60 Lacs in revenue respectively for expat, filer and non tax filer.
3. It gives non tax filers an option to buy property yet taxes them heavily to achieve revenue generation targets.
4. Tax will be reduced in general on residential properties thus facilitating 90% of consumers and genuine home seekers.
5. Tax slabs for investment properties and luxury properties will ensure that while genuine home seekers will be benefited however investors will pay extra tax on second properties and luxury real estate.

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