FY24-FY26: Punjab plans to boost property tax collection thru mobilisation strategy

LAHORE: The Punjab government was planning to reform the property tax system to make it more transparent, broad-based and progressive, with an objective to increase its collection from Rs16 million (figures of fiscal year 2021-2022) to Rs74 million in three years.

This was a part of Revenue Mobilisation Strategy and Plan for fiscal years 2023/24-2025/26, formulated by the Punjab Finance Department. The document observed that Punjab’s collection was extremely low; the property tax to GDP Ratio of Punjab has been hovering around 0.04 percent between FY16 and FY22.

Recent estimates prepared by the Punjab Excise, Taxation and Narcotics Control Department (ETNCD) with the help of external researchers and analysts suggest that Punjab’s property tax collection was approximately 0.07 percent of the aggregate capital value of registered immovable properties based on DC rates.

“Meanwhile, property tax collection around the world was much higher. As per World Bank’s analyses, even low-income countries collect more than 0.30 percent of GDP in property taxes. This illustrates that UIPT has a much greater revenue potential than what is currently being collected,” it added.

It also noted that currently, a limited number of urban properties were subject to property tax while rural properties were not subjected to property tax at all. It has also been observed that due to rapid urbanisation, many erstwhile rural areas beyond the scope of property tax could now be considered urban areas.

Moreover, many cities and towns have expanded, requiring rating areas to be enhanced accordingly. Hence, as a part of the reforms, the government intends to broaden the scope of the tax by bringing all immovable properties in the province within the ambit of immovable property tax with the passage of time.

The government would also review and bring changes in the criteria for the Gross Annual Rental Value (GARV); the tax was calculated based on a percentage of the GARV and the GARV itself was determined through property surveys after every five years.

In the document, it was observed that the current valuation system tends to underestimate the values of properties because most properties were not actually rented out, rental values of properties were generally too low relative to their capital values and information regarding market rents of properties was not publicly available.

“Moreover, GARV was particularly inadequate as a valuation measure in the case of vacant plots and properties with relatively smaller covered areas and older construction. Hence, the system is highly inefficient in capturing changes in property values over time as the valuation remains fixed for at least five years,” it added.

Thus, the document advocated a holistic policy and moving to a capital valuation of property in a phased manner, including adoption of DC rates as a proxy of the capital value of a property. It observed that the DC rates was a relatively more suitable and robust measure of the valuation of immovable property, which was revised every year and hence, these were better at capturing changes in market values.

“Hence, the government would move from GARV to capital valuation of property in a phased manner as measured by DC rates, as the latter was a more transparent, dynamic, well-understood, widely followed and robust measure of property value,” it added.

The government intends to bring fairness in the property tax system, which it believes should be fair and should ensure horizontal equity so that similar properties have similar valuations.

“Right now, open plots of land and properties with smaller constructed/covered areas are subject to very low levels of tax while constructed properties with greater covered area, on the other hand, are subjected to significantly higher levels of taxation.

Moreover, rented-out properties were subjected to relatively higher levels of taxation compared with self-occupied properties. Hence, the property tax system encourages holdings of open plots, discouraged the construction of a property and created a disincentive to rent out the property,” it observed.

The government has shown intention of phasing out exemptions given on UIPT. The document observed that there are several exemptions based on the land area of the property and also the type of the owner were exempt from tax altogether.

“A large proportion, around two-thirds of all properties registered with ETNCD, of properties have become completely exempt from tax due to wide-ranging exemptions,” it revealed, adding that these exemptions have contributed to a regressive taxation structure in which highly valuable properties with smaller land areas or owned by taxpayers meeting certain criteria were not subjected to tax.

“Thus, the government would ensure that exemptions were phased out and replaced with a single value-based exemption; in other words, no property tax would be payable as long as the aggregate value of immovable properties was below a certain predetermined threshold,” it added.

Currently, the tax was being levied in respect of each property rather than on the combined value of all properties owned by each taxpayer. To make this tax progressive so that the wealthy should bear a higher burden of tax, the government intends to redesign the property tax as a progressive tax.

“The marginal tax rate would increase as the aggregate value of the properties exceeds certain pre-defined thresholds,” it added.

“To properly administer the progressive structure of the tax, a complete database of all immovable properties in the province and names of owners along with the unique identification numbers (identity cards of individuals, registrations numbers in case of corporations and other institutional units) would be developed and maintained,” it added.

Copyright Business Recorder, 2023