The Competition Commission of Pakistan (CCP) has termed the Federal Board of Revenue''s tax policy for real estate sector as unfair and recommended formulation of tax policy in consultation with the stakeholders to maximise its effectiveness and assist in widening the tax net.
According to the CCP opinion on real estate sector issued Monday, the tax policies of the government are ''unfair''. The stakeholders are willing to pay taxes, however, the tax policy should be formulated in collaboration with the important stakeholders to maximize its effectiveness and assist in widening of the tax net. It should be levied gradually and uniformly as millions of people are associated with it.
The CCP report said laws for individual business taxation of different lands many vary, for example; capital gains is levied under the Income Tax Ordinance, 2001, whilst the capital value tax on the immoveable property, subsequent to the 18th Amendment in the Constitution has been levied by the Provinces through separate provincial legislations and in the Islamabad Capital Territory by the Finance Act, 2012.
Securities and Exchange Commission of Pakistan (SECP) had introduced the Real Estate Investment Trusts Regulations (REITs), 2015 introduced the concept of real estate investment trusts. Any income from such trust is exempt from tax, subject to the condition that not less than 90 percent of its profits for the year is distributed amongst the unit holders. The REITs Regulations have been amended in December 2018 by the SECP. The amendments include the concept of private investors, details on eligibility criteria to invest in REIT scheme, introduction of grace period for mandatory listing, requirement of valuation from two separate property valuers at the time of transfer of real estate to REIT scheme, enhancing REIT Management Company''s (RMCs) capacity to borrow and issue right units. The amendments also include the requirement of unit holders'' approval in case of major decisions pertaining to REIT in order to protect their interest and enhance their role in the decision making process.
The real estate sector operators made their fortune owing to a regulatory vacuum and inefficient revenue machinery, as the federal and provincial governments looked the other way for political reasons. In the process, tens of thousands of gullible individuals lost their life time earnings amid scattered legislation and governing bylaws in municipalities and local governments. No wonder therefore, that the property industry suffered from serious credibility challenges - low public confidence, unfair business practices, weak transparency and limited financial inclusion. All provincial governments failed to effectively bring a booming sector into the real economy and pay even a fraction of what real estate agents earned.
An ambitious revenue measure launched last year by the federal government through capital value tax and revised valuation of properties finally ended in yet another tax amnesty. An overwhelming chunk of the housing schemes continue to be governed under the Cooperatives Societies Act of 1925, or specific acts of parliament for various development authorities, CCP said.
The key regulators - the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) - have been advising the government to provide an overarching legal framework to bring these fly-by night investors into the formal economy. Taking a step forward, the government has now brought the property sector in the ambit of the Companies Act of 2017. Under the new law, companies would also not be eligible to accept a sum against purchase of the apartment, plot or building, as the case may be, as an advance payment from a person without first entering into a written agreement for sale with such person.
Another major concern pointed out by various participants is that accurate and systematic records related to various forms of property available for sale and purchase are not maintained. Consequently, various issues arise. Unreliable and insufficient data hinders the mutation or transfer of property, both commercial and residential. Other problems caused by such inadequacies include multiple sale of the same property, over-pricing of property, resultant unfair taxation and tax evasion, fraud, etc, the CCP report added.
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