Before you assume that this is another blog about how the Finance Bill 2016 has made things difficult for the real estate sector, let me clarify that it is not. In fact, it discusses some of the very useful suggestions given by Naveed Zafar Ashfaq Jaffery & Co, a reputed chartered accountancy firm of Pakistan to the Finance Minister, Mr Ishaq Dar.
According to a news report published in national dailies today, Dar has shown interest in considering these options with an open mind and heart. We should be able to see the final outcome of these considerations by the end of this month. So that’s one piece of good news for the time being!
Naveed Zafar Ashfaq Jaffery & Co’s senior partner Ashfaq Tola sent his recommendations to the department regarding amendments made in the Income Tax Ordinance Section 68, according to Express Tribune. In a meeting held with the senior Federal Board of Revenue (FBR) officials yesterday, Dar asked to call the stakeholders in the coming week to find a solution to the existing chaos spurred by the amendments made in the property valuation laws.
According to the report published in local newspapers today, different options are being considered to assess the real time market value of property in Pakistan. Please bear in mind that, according to FBR, all the amendments made in Section 68 are intended to stop black money from being stowed in the property sector. The news report also reads that despite the immense pressure being exercised by prominent companies from across the country, Dar stands firm on blocking this channel for black money.
The suggestions considered in this meeting between Dar and FBR officials are discussed below:
One-time tax amnesty
One-time tax amnesty should be introduced to declare the current market value of the property. FBR can the collect 2% or 3% tax on the difference between the old rate quoted per the DC value and the declared current value. The suggestion under consideration also proposes that this 2% or 3% tax should not be paid if the property has been held for over 5 years!
Fixed tax on each transaction
The second suggestion given by Mr Tola, and also discussed in the Dar and FBR officials meeting, is to impose a fixed tax of 3% on every transaction of property at hand. Again, this tax would be applicable on the amount of difference between the DC rate and current market value.
Valuation Table revamp at provincial level
Tola’s third suggestion is to revamp the values recorded in the valuation table of the collectors of each district at provincial level under Section 27-A of the Stamp Act 1899 and bring it to par with the market value of real estate. Considering the fact that the difference between the DC rate and market value is huge, the values may be increased in a period of 2 to 3 years.
To me, these suggestions sound quite reasonable; what’s your take on it? Let me know in the comments.
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I think the idea to give relief on CGT on properties purchased previously makes sense. Previous transactions were recorded on DC rates, and in many cases the registry would refuse to record transactions at anything other than the DC rate for fear that they may upset the fake benchmark, if CGT is then levied on the difference between the previous DC price and the current market value, that would be unfair – so it is sensible for there to be a grandfathering clause which protects people from paying excessive CGT. The best way to do this is to lower the CGT rate on such properties, and perhaps reduce the holding period back from 5 years to 2 years.
However, I hope the government stands firm on recording the current sale at market prices, and levying taxes accordingly. As I buyer and income-tax payer, I certainly don’t mind paying the income tax because i can offset it at the end of the year and claim a refund. Recording future transactions at market rate would also achieve the aim of stemming the flow of black money into this sector, as this would lead to questions being asked about the source of funds.
People on your previous article have been using the phrase, “Nowhere in the world…” to decry the new measures. Let me use the same phrase to support them by stating that nowhere in the world is it legal to record the price of the sale at a fraction of the actual price. Real estate brokers and lawyers involved in any such transactions lose their licenses for acts like these, and the buyer/seller are liable for a heavy financial penalty, and can even go to jail.
As far as I can understand, anyone who is arguing in favour of continuing with the previous DC mechanism is arguing for black money ruling the roost with impunity, people not paying their fair share of taxes etc. Would like your editorial position on this.
Cheers,
Arif
Mr. Arif your statements and defending GOV tax policy is same as Pakistan information ministry doing now a days 😛
Such ridiculous ideas, which will never be accepted. Why will governement give 2-3 years to corrupt people to through these new rules. Absolutely makes no sense. If ever property prices are to been assessed on actual market value it has to be done in one go!
Agree with you. The prices recorded must shift immediately to the market value, but I do have some sympathy for the argument to lower CGT for people whose purchases have been recorded previously at the DC rate. Taxing them at the difference between the DC and market value would also lead to unfairly high taxes.
Government needs to be realistic in its taxes. The PKR usually depreciates against USD at rate of 7-10% yearly. This is important as a majority of investors are overseas and they remit their USD or pegged currencies to PKR. There are plenty of CVT, WHT, Registration, stamp duty, dealer fees etc. exist already. This will overall make real estate not an investment friendly sector and transactions will drop significantly as invested money shall gain atleast 50% to get into a profit equilibrium,
Government shall find a way to increase tax generation by increasing the transactions volume and not the taxes.
And is this why a real estate transaction should be recorded at less than its actual value, so that people can declare assets at less than their real value and hide black money????
You spent quite a time on copy/pasting the material from Newspaper. It would have been easier if you simply posted the link
Its for those who haven’t read it in news and its not a copy paste.
Either from news or personal sources but its helping ppl to understand whats going on, i am one of them who enjoy reading article and comments.
Hi Samra Z
Readers are keen..be careful….
Samra ..do you forgot DHA VALLEY….???
Government need to do much more than this. The whole real estate market needs to be regularized. Here every Tom, Dick and Harry becomes a real estate agent. Actually the more ruthless and cunning you are, more successful you become in real estate business. These self-claimed agents lie to their customers, encourage deceptive practices and take advantage of some customers lack of knowledge.
I think there should be real estate certification courses carried out by universities and only qualified agents should become real estate agents. No one else should be able to open a real estate business except qualified people, who understand finances, taxation laws and its impact on economy. I know this may not go well with lot of dealers, but it will benefit real estate sector in the long run.
Completely agree. Most of the world has licensing requirements to become a real estate dealer. I think Pakistan possibly has one the highest rates of per capita estate agents due to the fact that anyone can rent a shop, put a sign board and declare themselves to be a property dealer/adviser.
Govt should force people to declare their source of income to stop black money investments.
Should increase tax return and decrease taxes on property.
Its OK to pay 3-4 lac tax on 100 lac property transfer but more than that would be rip off and it will make life tough for genuine buyer as well.
For once, what the government is saying is actually making sense. Please explain why you feel that property transactions should continue to be recorded at less than market value, so that people can hide their black money in property. I would like to understand your reasoning :).
to all respected members and fellow stakeholders,
I myself am a realtor in the DHA Lahore Market. Sitting in a position where everyone believes that this is being argued and negated only by the real estate community, you are wrong. There are two sides to the coin looking at a picture from a narrow view would not do any good to either investors, realtors or concerned citizens who’d like to flush black money out of this market.
The point I agree upon is the flushing of black money from this sector which is around 3 trillion rupees as per government figures which would see a sudden dip in prices and a slump in the real estate sector, for people who are unaware real estate sector is the second largest in terms of employment. But I don’t mind the dip because it’ll be a plague all over Pakistan in the real estate plus the curse of black money would be eliminated or diminished to a negligible size.
But the high transaction cost of 6% out of which 3% as stamp duty, 2% as CVT and 1% as Advance tax, should be reduced to 2% at the maximum for all which would still generate huge revenues as the taxes would be levied on the Fair Market Value instead of the DC rates e.g. Phase 8 DC rate 33 lacs means 198000 in terms of tax whereas 2% of FMV which should be around 250 lacs means 5 lacs in terms of tax revenues.
As far as tax amnesty goes it should be given for previous purchases but that’d mean giving people with black money to turn it into white. Instead of such tax amnesty I believe declaration of FMV should be necessary for all for subsequent years so that at least people with white money are given relaxation of 2 to 3% whereas undeclared money goes into question with the authorities. The tenure of 5 years is altogether stupid to say the least. It should be reduced to 3 years at the most plus holding a asset for three years you shouldn’t still be paying such a high price, it should be within the first year 10%, the second year half at 5% and for the third year 2.5%. This would ensure an investor friendly investment environment.
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Khawaja Umer Shehzad
Investment Consultant
@khawaja Umar Shehzad – I think these are very sensible suggestions which achieve the desired goals of flushing out the black money while reducing the burden of cumbersome transaction. I wish these were the suggestions the real estate agent community were focusing on, instead of agitating for the continuation of the corrupt DC mechanism to allow black money to thrive.
good one, make sense and workable and will solve problem. BTW advance tax is now 2% for filer and 4% for no filer. so it make makes transaction cost to be 7-9% of FMV shall be too much. correct me if i am wrong. Decrease takes to 2%-3% of the FMV and it makes sense.
The Finance Ministry’s suggested changes in existing Property Tax structure [ Finance bill 2016] only addresses the issue of generating additional Revenues form the property sector …to tap a fresh Revenue source, primarily for paying off Interest on IMF loans … and only by default, meet the Developmental expenses of state …
It’s being thought … that by ‘inducting’ Black money of the property sector into National economy’s Tax Net, will generate the ‘required’ additional Revenues … however, any drastic measures without representation of the involved parties, will not increase Tax receipts, it will spurt the Flight of Capital [both Black and White] from it’s Present Moorings in Pakistan, it could spell disaster for the economy..
The proposed changes … at best, would mean Black money’s channelization into Gold, Stocks and Shares, and other ‘invisible’ activities … whereas in the worst case scenario … it would lead to outright flight of capital, from the country …
Although, the Finance Ministry’s proposal, is ‘theoretically’ sound … but practically, it’s most unsound … In, that Black money is that “invisible component” of the Economy, that keeps the wheel moving … where property sector, is one of the few remaining “viable” sectors of our economy that finance, at least, 80% of all economic activity in Pakistan … and disrupting these, would only spell disaster for the national economy …
Reckon, the planners forget … that “Revenues of any State, hence, the Wealth of a State, is only increased, by enhancing Production” … because, Production creates Wealth, and that it’s not Loans, Borrowings or Taxes.that make a country Rich … It’s Production and ‘regulated’ Production, naturally leads to better Tax Revenues … hence, state needed Funds .
Any move that disturbs the ‘ground reality’ of any viable arrangements … will only destroy, whatever little we now have by way of Economic activity …and that, would drastically lessen the state’s Tax receipts, and such would immediately Bankrupt the “Loans based’ economy of ours …
I therefore suggest …
“The government should “liberalize” all Trade and Industry … Introduce a Flat 3% to rate of Taxation on Industrial Production, even lesser rate for exports oriented Production… Impose a flat 5% Trade on all domestic Trade and 10% on International Trade … that these simple steps, will generate Revenues that are more than enough to meet the present and foreseeable demands of our economy …
It will be better if they decrease the CGT from 10% to 5% and 5 years holding period is fine but it should be applicable on properties purchased after the implementation of this new tax law
Khawaja Umer Shehzad’s suggestions are sensible