Taxing real estate trade

After failing to obtain relevant data from the local agents of Pakistani citizens who have made huge investments in Dubai's real estate sector, the Central Board of Revenue has decided to approach the UAE government for help in collecting the desired information.
The information will be sought under the conventions signed by the two countries on avoidance of double taxation and prevention of fiscal evasion. According to a Recorder Report, a Regional Commissioner of Income Tax, based in Islamabad, has admitted the department's inability to obtain details about Pakistani real estate investors in UAE, which in a way reflects the influence they wield in various fields in Pakistan.
CBR's decision to focus on operations of Pakistani investors in Dubai and London, is a part of its broader strategy to streamline, restructure and widen the tax base in order to generate additional revenue. Preliminary investigations have revealed that many Dubai-based companies, some not having a single branch office in Pakistan, persuade moneyed people in the country to invest in real estate in Dubai or London, with the astronomical returns promised by them serving as an irresistible incentive.
The promoters, who are mostly Dubai-based businessmen, often place alluring advertisements in print and electronic media to attract property buyers. The transactions are usually conducted directly with the buyers, and the payments made mostly through the illegal Hundi channel. The loopholes in the provisions of Income Tax Ordinance 2001 are believed also to have encouraged such deals.
Investigations by CBR have revealed that the Dubai-based companies also offer visa, credit and payback guarantees to the prospective investors as additional inducements.
It is said that some affluent Pakistanis have invested over two billion rupees in Dubai's real estate over the last two years alone. Obviously, flight of capital from the country on this scale is bound to harm its economy.
According to a national daily, the government had conducted a probe last year to determine the causes of a steady decline in foreign exchange inflows. In the backdrop of the investigations, the CBR officials issued notices to authorised agents of Dubai-based companies in Lahore and Karachi to provide the record of local investors, but to no avail.
The secrecy on the part of the agents is quite understandable, but it is difficult to comprehend why the CBR authorities could not extract the required information from them. There are stringent income tax laws that could have been invoked to make them divulge the details. Why the CBR authorities failed to apply these laws needs a separate investigation.
A trend has, meanwhile, developed among Dubai-based Pakistani investors to make investments in the local real estate sector. This has been instrumental in further pushing up the property prices in the country. It seems that the more resourceful and well-connected among the Pakistani real estate investors have been acting on an ingenious methodology under which plots obtained through allotment at throwaway rates are sold to generate funds, which in turn are invested in thriving real estate markets like those in Dubai, etc.
The multiple profit is then re-invested in Pakistan, as saturation in Dubai market is apparently leading the investors to invest back in Pakistan, in order to retain hold on the local market as well. Machinations of investors have thus sent property prices skyrocketing, thereby worsening the housing problem in the country.
Many changes have been made in forex laws that allow Pakistani citizens to maintain foreign exchange bank accounts in the country. This should have dimmed the lure of foreign currency. Second, despite its best efforts, the government has failed to stamp out the Hundi business, largely because of the latter's unfailing reliability.
This has impeded the flow of foreign exchange into the country. The menace can be countered only through injecting greater efficiency into our banking sector. The flight of capital which the involvement of Pakistani investors in foreign real estate markets represents, needs to be stopped, under a cogent strategy.
There is no reason why the UAE government should not help Islamabad bring the Pakistani real estate investors into the tax net. Lastly, only a uniform application of tax laws, regardless of the violator's social position or professional background, can help eradicate the evil. Unfortunately, the real estate sector has come to attract many unscrupulous elements, out to make a fast buck.
Such overnight "real estate advisers" need to be suitably leashed. And the CBR should take its campaign to broaden the tax base to its logical conclusion, in the larger interest of the country.