Rising urbanization in Punjab, has led to a large influx of people to Lahore from other parts of the province. This has resulted in increasing pressure on the demand of affordable housing in the metropolis.
However, the governments imposition of a 5 percent property tax has resulted in distorting incentives for rental accommodation in the city. The tax authorities are currently charging a much higher slab rate for valuation of rental properties.
The purpose of property tax is to collect revenues for the provision of public services, such as roads, street lighting, fire brigades, sewerage etc, at a local level, which is why ideally it should be done by local governments rather than the provincial government.
Since property tax pertains to the provision of public services which in turn is closely linked to the size of local population, it may be logical to have a higher rate for a property whose two units (for example) are occupied by two different households (by way of tenancy), as against a property whose both units are occupied by one household.
But such is not the case here. The bone of contention is the valuation methodology and whether it results in discouraging the provision of affordable housing in a country where housing is short is expected to remain in the foreseeable future.
When contacted by BR Research, officials at the Punjab Excise and Taxation department were of the view that the revised valuation was conducted in 2014 almost thirteen years after the previous valuation in 2001. Although the time period might very well be the reason behind increase in valuations across all categories, the previous methodology calculated additional tax due to rental on the basis of rent earned by the property. Although, this was a more relevant measure, flat rates were introduced later on because of documentation issues and accuracy of claimed rent figures by property owners.
From an economic standpoint, the property tax rates should be structured in such a way that they encourage rent-friendly accommodation. Dr. Nasir Ejaz, CEO of The Urban Unit, in a recent interview with BR Research shared this columns view that property taxes should be brought on the lower side in order to facilitate rental-friendly housing.
According to Dr. Nasir The property tax for rented accommodation is getting higher whereas for self-owned property it is on the lower side. This leads to the illogical outcome of subsidising the rich rather than the poor. What incentive will there be to rent if you are taxing renters? We have to encourage rental friendly laws and tax incentives to encourage better utilisation of land.
In a report titled Urbanisation and growth published by the Commission on Growth and Development for the World Bank, property taxes have been labelled as cumbersome, costly to administer and highly unpopular with the challenges multiplying for developing countries. The commission notes that in the absence of accurate market valuation, tax officials must do their own estimation which demands some skill and leaves ample discretion which opens the door to corruption.
Currently, the average rental yields in Lahore range from 3-5 percent with the variation dependent on the locality. It is highly probable that in the long run the increased valuation for rented housing for tax purposes will result in the rental yield going up. The benefits of the tax will accrue to the provincial government whereas the burden of tax will ultimately be passed through to the tenants.
As an example, lets take category A in the valuation table shown above. The valuation rate for land is Rs23 per sq. ft. for covered area of rented portion whereas it is Rs4.6 per sq. ft. for selfowned residential properties. This results in the valuation of rented property being five times higher across all categories.
Housing is considered a basic need but the government has been unable to provide quality affordable housing to the masses. Consequentially, it already constitutes a high share of disposable income for the majority of citizens falling in the middle and lower income segments.
Until such time that mortgage financing is developed in the country and home ownership is made possible for the majority, this exorbitant valuation of rental accommodation clearly puts pressure on supply of affordable housing in rapidly urbanizing areas and should be brought down at par with self-owned valuation.
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