Almost the same time last year, the real estate market was jolted for regulation and oversight for what could be the first time in history. Upheavals in the property market followed as transactions came to a standstill and the builders and developers threatened to stop all activity as Budget 2016-17 revamped the valuation and tax regime for the property sector.
Recall that the Federal Board of Revenue took on the responsibility to bring the value of immovable property (known as the DC rates) in line with the fair market values through an amendment in the Finance Act 2016 that took away the provincial governments’ rights to notify property prices. This step was necessary to bridge the rising gap between DC rates and the fair market value, which has been increasing over the year exorbitantly. Apart from increasing the base for taxation purpose, the FBR also increased the Capital Gains Tax (CGT) and Withholding Tax; the previously flat CGT at 5 percent on all properties purchased up till June 30, 2016, and sold within three years, was raised to 10 percent for property sold within one year of purchase, 7.5 percent for property sold within three years, and 5 percent for property sold within 5 years of purchase. And the withholding taxes were doubled: from one to two percent for the filers, and from two to four percent for non-filers.
Continuing with the exercise to bring the property prices at par with the market values, a second round of valuation exercise is expected next month. It is being reported that there will be about 30 percent increase in rates for major cities of the country. A few things need to be clarified before the market participants rattle once again.
First, the move to correct the valuation is a step in the right direction for a sector where the void between DC rates and the fair market values has been a key factor behind the rise in black money in the sector. Secondly, amid the noise and clamour against it, the second round of valuation is equally important not only to rationalise property prices, but also to eliminate confusion and converge to a single rate in the long term; right now the real estate market has three rates operational: DC rates for taxes like stamp duty, CVT and registration fee; FBR notified rates as of 2016 for taxes including WHT and CGT; and Fair Market Values.
Third, the implementation of a refined valuation and taxation process is not ad-hoc; you need to bring stakeholders aboard. This was a learning lesson last time as the reaction from the stakeholders was followed by months of consultations and deliberations, which concluded in what is largely considered ineffective at increasing revenues and tax base - a Tax Amnesty Scheme. It was decided that FBR-determined rates would be fixed at around 30 percent of the market value, and the DC rates would increase by 20 percent on average, while giving the non-filers a chance to document by paying only three percent tax on the difference between the DC and FBR rates. Nonetheless, the resistance might be lower this time as the stakeholders have been aware of FBR’s objective to gradually increase rates in the next few years to bring them close to reality.
A second phase of valuation is also significant for FBR as the revenue generation even after the opposition from the parties involved from phase one was around 100 percent higher in the first ten months of the fiscal (to around Rs15 billion). As per the latest reported plans, the government is expected to add more cities to its original 21 last year.
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