Islamabad: The Pakistan Institute of Development Economics (PIDE), a think tank within the Planning Commission, has underscored significant disparities in property valuation rates and proposed a solution that involves eliminating both the DC and FBR notified rates, replacing them with an auction market, according to news published on October 27.
The prevailing market rate, which reflects the actual prices at which real estate transactions occur, is approximately 5 to 10 times higher than the DC rate and 2 to 4 times higher than the FBR rate.
The PIDE has recommended selling properties through an online portal, where anyone can purchase a property for a price that is 10% higher than the bid price listed on the portal.
To address the challenge of varying valuation rates, the proposal suggests establishing a proper real estate market. One potential solution involves implementing multiple listing services that enable property auctions. The managing authority of the online portal would issue a contract certificate, subject to the consensus of both parties and the submission of an advance payment. Property transfer would only proceed upon receipt of this certificate.
Presently, the real estate market operates with at least three different property valuation rates: the Federal Board of Revenue (FBR) immovable property valuation, the District Collector (DC) rate, and market rates. These multiple rates exist primarily for revenue purposes. While transactions occur at market rates, the recorded property prices are mainly determined by the government’s DC rate in alignment with government expectations.
Provincial governments use the DC rate to calculate stamp duty and Capital Value Tax (CVT). The Stamp Act (1899) Section 27-A mandates that duty on immovable property be assessed according to property value, using the DC notified value table/rate for property valuation.
The DC establishes property valuations based on property characteristics, such as location (district, tehsil), type (urban or rural), and nature (land classification). The practice of applying the DC rate at the time of property mutation was officially adopted in the 1980s with the objectives of improving sector efficiency, maximizing tax revenue, and controlling price fluctuations.
Subsequently, stamp duty and CVT, under provincial jurisdiction, are calculated based on DC rates during property mutation. Initially, the federal government also used DC rates to compute capital gains and withholding taxes. However, the Income Tax Ordinance 2001 transferred the power to determine property prices to the commissioner. The Income Tax Rules 2002 outlined the mechanism for commissioners to determine fair market prices.
To address the valuation gap between the DC rate and the market rate, the FBR began issuing immovable property valuations for various cities in Pakistan in 2016. These valuation tables aim to align with market rates and have been revised by the FBR in 2019 and 2022. Currently, capital gains tax and withholding tax on property sales are calculated based on FBR immovable property tables in notified localities, while the DC rate still applies to other areas.
Proposal for an Auction-Based Real Estate Market
Historical experiments with price controls and socialism in the 20th century revealed the challenges of setting prices accurately, as market rates fluctuate significantly and administrators struggle to maintain accurate pricing.
Considerable evidence supports the need for a reformed approach. To address the valuation disparity, the proposal recommends the following steps:
Eliminate DC rates and FBR valuation tables.
Advertise all properties for sale on a public portal.
Once a contract is settled, list it on the exchange for at least two weeks, known as the contract period, before a property transfer can occur. Legal authorities must require all contracts to be publicly disclosed on the exchange for two weeks for transfers to take place.
The contract period facilitates an auction market with the following conditions:
a. Any buyer can outbid and claim the contract under the following terms:
i. The bid price must be at least 10% higher than the previous bid.
ii. The new bid must match or improve upon the previous bid in terms.
iii. A deposit of double the previous bid’s amount is required unless the full price is paid upfront.
iv. Deposits are placed in escrow and forfeited in case of default.
b. The settlement date can be shortened but not extended.
Local authorities will only approve legal property transfers once these conditions are certified by portal managers. Transfers of property to family members through gifts or inheritance may be exempt from this mechanism.
Prior registration on the forum/portal, along with necessary information, is mandatory for all participants.
Hazafa reveres the art of writing and has been turned into a property enthusiast by profession. Her daily survival kit includes; tea, coffee, keyboard and paperbacks.
