Taxes are a nightmare for most people, especially for those who aren’t used to paying them. However, like almost everything else, there are both negative and positive aspects of a new tax and, if implemented correctly, taxes can be highly beneficial for the welfare of the nation.
Well, the time to ponder over taxes is upon us once again. The Budget 2016-17 is currently being drafted and will be presented in June as usual. While it may bring several positive changes in government spending, it seems like property investors are preparing for stifling developments.
According to sources, property transactions will be taxed at 5% for tax filers and at 8% for tax non-filers. This kind of tax rate can be rather burdensome for hefty property transactions and significantly hinder investment activity.
However, if our nightmare becomes a reality (which it probably will), property investors can still live with the help of an oxygen mask. It may not be the time yet to count their last breaths.
So how will the new property tax to be announced soon influence the real estate market? Here is my take on it.
Less property flipping
One of the activities causes property real estate prices to escalate is property flipping. Property flipping involves an investor vigilantly investing in an option for a short period of time, quickly selling it off when they realise a profit, and then buying something else almost immediately. This kind of frequent activity causes an escalation in investor activity, which consequently drives up prices.
However, as the tax rate for each property transaction will now be rather high, property flipping may decrease noticeably. While this can be a positive aspect and keep rates affordable for genuine buyers, it will harm investor and estate agent profits.
Squeezed profit margins
Profit margins for investment in real estate will substantially decrease because of the tax rate. Although the previous point explained the reduction in investment activity, profit margins will still be less than what they potentially could be without the tax even if activity is infrequent.
Not only will this be unattractive for investors, it will also place an additional burden on genuine buyers who will have to arrange finances to account for their share of the tax.
Long-term ownership
The levying of the tax means that it will be inconvenient to hold property for a short period of time. This is because the slight escalation in prices will not make up for the tax that is levied on property transactions. Thus, investors are likely to hold onto property for longer periods of time.
Therefore, prices will remain in check and not escalate as quickly as they did in the past. This can be interpreted as good news for the genuine buyer but not for the average investor.
While all of this sounds harsh, the least we can do is hope that the tax revenue will be used wisely and benefit the nation. Moreover, tax non-filers should file their tax returns immediately in order to avail the lower tax rate.
For now, investors must keep going, even with oxygen masks attached. We wish you the best of luck and hope that the property market remains as lucrative as it has been lately!
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interestingly. 29 april the news newspapers says it will be 2% tax maximum as ishaq dar. what is your source of 5-9% tax?
Good write up Anam.
Will appreciate if you also give an advice on how to behave before the tax. Those waiting for buying or selling, should they take any quick decision on this
Will this be 5 or 8% on total cost of the plot/house ?
What a load of crap.
Investors. Stay alert. Time is close as election is getting nearer and nearer. Things will go BooM
Anam,
When you speak about tax on property transactions, you have to be specific and differentiate between the following categories which are already imposed:
1) CGT-Capital Gain Tax (Section 37(1A)) — seller pays: 10% of gain if sold within 1 year, and 5% of gain if sold between 1 and 2 years. 0% if sold after 2 years
2) Adjustable Withholding Tax on transfers (Section 236C) — seller pays:: 0.5% of sale value for filers and 1% for non-filers.
3) Advance Tax on purchase/transfer (Section 236K) — buyer pays: 0% if under Rs. 3 million; 1% filer and 2% non-filer if more than Rs.3 mil.
If the tax you mentioned is 2nd category, then this would be a substantial jump from the existing rate and inflict huge loss to a seller if selling on break-even. If 3rd category (236K) then this would discourage purchase and would impact negatively on demand.
But I am of thy believe, that it will have no effect on long term investors, as the tax will ultimately become part of the new price ,,, please have your say on that ,,