Real estate amnesty

Mian Abdul Mannan, a member of a three-person joint parliamentary sub-committee of the National Assembly and Senate finance committee, has revealed that an agreement has been reached to endorse a legislation that would extend a one-time amnesty to the real estate sector. The need for some amnesty was necessary because there has been a virtual cessation of purchase/sale of property subsequent to the enactment of the Finance Act 2016. The Act stipulates notification by the Federal Board of Revenue (FBR) of property values in major cities/towns of the country instead of the DC rates that over time grossly understate the actual market rates; and levies Capital Gains Tax on the difference in the purchase and sale price, if a property is sold within five years of its purchase.
In the interim period, the government offered to the sector to tax a filer at the rate of 2 percent, instead of the previous 1 percent, while a non-filer would be liable to pay 4 percent instead of the previous 2 percent as per the DC rates; however, this deal did not hold and real estate activity remained almost non-existent.
There is no doubt about the fact that the real estate sector has emerged in Pakistan as the most attractive, in terms of profitability as well as for parking money that is largely tax evaded/laundered; and this accounts for the real estate bubble that has literally made any purchase of property by the middle income group as well as the upper middle class difficult if not impossible. There was, therefore, a need for the government to undertake appropriate measures to not only bring down the price of real estate to affordable levels to enable the honest taxpayers a chance to purchase property with their life's earnings but also do it in a manner that would be considered fair. It is for these reasons that Business Recorder fully supported the measures with respect to the real estate sector in the budget 2016.
However, with no activity in the real estate sector the joint committee has proposed an amnesty which according to Mannan would "grant a one-time amnesty for money whitening invested in this sector under which a 3 percent tax will be charged between declared value of DC rates and price tables notified by the Federal Board of Revenue." The amnesty would be extended through a bill that would be tabled in parliament. In this context, one would urge parliament to revisit a warning by the International Monetary Fund (IMF) in the second review under the 6.64 billion dollar Extended Fund Facility subsequent to the tax amnesty package passed in December 2013: "the authorities seek to encourage investment and widen the tax net with a package of measures that reduces tax scrutiny and provides an amnesty for some taxpayers... the package opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment, and raises potential money laundering risks. The immunity from routine audit hinders self-assessment process, and the amnesty - entailed by waiving penalties and interests - is likely to be detrimental to improving compliance and collections as taxpayers will develop an expectation of future immunities." In other words, this amnesty should be a one-off and no further amnesties for the sector should be entertained.
In addition, this newspaper would suggest that the government consider arresting all deals of benami holdings and adopt the principle that is in practice in defence housing societies notably that there is no transfer of property on a power of attorney and insist on the physical presence of the seller.