EDITORIAL: With the economy in the process of stabilising, various sectors across the board have started performing better. Interest rates have been slashed to almost half, which generally bodes well for asset classes to thrive — the upbeat performance of the stock market could be described as a strong case in point.
However, the real estate market remained almost dormant over the past year despite gains in economic stability. At first glance, this defies economic logic, but there is more to it, so to speak.
Historically, real estate in Pakistan has generally moved in one direction — upward. During downturns, the market becomes stagnant, as investors typically do not sell at a loss. This partially explains the current lull in the market. The rest can be attributed to the imposition of higher transaction taxes, including withholding taxes (WHTs) levied on buyers and sellers alike, in addition to the Federal Excise Duty (FED).
The rationale behind higher income WHT on transactions is that the sector largely operates informally. The valuation at which provincial taxes (such as stamp duty registration fee) are imposed is often only a fraction of the actual market value.
Meanwhile, the income tax withholding is based on the Federal Board of Revenue (FBR) valuation, which, though significantly higher than the provincial valuation (commonly known as the DC rate) but still falls substantially short of the real transaction (market) value.
Such practices invariably introduce shades of grey into the sector. Even those who are fully tax-compliant often disclose transactions at the FBR (or DC) valuation, effectively converting part of their white money into black. To avoid this, compliant players must either sell at a discount or buy at a premium. Most people opt out, further increasing the informal nature of the market.
The federal government is desperate to increase FBR tax revenues, and the International Monetary Fund (IMF) insists that all income be taxed equally. Currently, the taxation burden disproportionately falls on formal businesses and salaried individuals, who pay tax rates comparable to those in Scandinavian countries — despite receiving no comparable benefits in education, healthcare, environment, or security. The IMF and the government are both facing a backlash from compliant sectors, which is fuelling the government resolve to tax real estate more aggressively.
Recently, discussions about reducing the tax burden on real estate and providing fiscal, regulatory, and monetary incentives to promote affordable housing have emerged. The aim is to generate direct and indirect employment and boost economic activity through the construction sector. A task force has been formed, though its first meeting is still awaited.
Interestingly, formal business bodies and some media circles are vocally opposing the anticipated real estate package. This reaction is unwarranted. Real estate is a legitimate business, and some of the recommendations put forth by real estate stakeholders have merit. These proposals could help revive transactions and reinvigorate the construction sector. However, housing alone cannot be considered an engine of economic growth.
The resentment from the formal sector and salaried individuals seems to have stemmed from frustration over being heavily taxed while competing against undocumented businesses that enjoy an unfair advantage. This anger also reflects broader concerns about wealth erosion and declining purchasing power.
Before forming opinions, it is important to filter these factors. Yes, the withholding tax on transactions is high, but it can be adjusted against income. The imposition of FED on real estate is entirely unjustified. FED is a punitive tax, typically imposed on tobacco and alcohol to discourage consumption. There is no logical reason for it to be applied to real estate — it should be abolished.
Furthermore, the FBR’s objective of increasing tax revenues is not being met, as actual collections have declined since tax rates were raised. Rationalizing these rates would serve the FBR’s interests as well. Additionally, harmonizing taxes and valuations between provincial and federal authorities is crucial.
An FBR official is reported to have said that there is a significant drop in property transactions and increase in property deals through power of attorney. To stem this practice, sale of property on power of attorney should be banned so that property transactions off the books cannot take place while purchase of property on power of attorney may be possible to obviate unnecessary hardship.
In the upcoming budget, real estate should be viewed through the lens of documentation. Efforts should focus on digitising the sector and ensuring transparency regarding buyers’ sources of income, as is required for other asset classes. Housing scams should be curbed through better investment and financing mechanisms. Consumer protection is vital, and intermediary investors should be taxed on capital gains.
The sector must become more transparent, reducing its grey areas while ensuring that taxation remains fair. Reforming real estate is easier said than done, but it is long overdue. The time for meaningful reforms is now.
Copyright Business Recorder, 2025
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