EDITORIAL: In a significant move, the FBR has substantively increased valuations of immovable properties by up to 75 percent of their existing market values in 56 cities across the country.
By aligning property valuations closer to prevalent market rates, the tax body is aiming to achieve two overarching objectives: increasing revenue collection and channeling investment into more productive sectors of the economy.
The new rates take effect from November 1, with this revision being used to calculate federal taxes, including capital gains tax and withholding tax.
It is pertinent to note that real estate continues to be a major segment for parking of tax-evaded funds, as well as illicitly acquired black money.
On top of that, investments in the sector can too often be very aptly termed to be dead or unproductive, where investors acquire properties for speculation purposes instead of developing them for housing or commercial projects that would put the land to productive use.
As has been noted in this space before, a major reason that this phenomenon remains so deeply entrenched in Pakistan is due to the way real estate has been historically taxed.
Until 2016, tax on real estate transactions was charged on the basis of the valuations notified by district collectors, with these rates being substantially lower than the actual transaction value, creating a gaping loophole that not only led to tax collections taking a major hit, this also fostered an environment that incentivised people to continually invest in an unproductive sector rather than in areas that would drive economic growth.
With the fiscal space at the federal government’s disposal becoming increasingly constrained and rising pressure from international lenders to reform the various anomalies afflicting our tax structure, the FBR has been trying to come up with reliable ways to determine fair market values for urban properties since 2016, and in this respect has adjusted property valuations four times in the recent past — in 2018, 2019, 2021 and 2022.
While the latest such effort is welcome, it should be noted that there is still further room for increasing the valuations determined by the FBR, as property rates assessed remain below market value, and as reported by a local daily, a senior official of the organisation has admitted that the new rates were “well below market expectations”.
Determining accurate property values has been a tall order for the FBR as property prices can differ widely between cities, and between different areas within the same cities. To compound these technical complexities is the fact that there is inevitable resistance from vested interests that have poured in huge sums in the real estate sector and would be loath to see their investments take any substantial hit.
Additionally, another significant incongruity that must be addressed is the fact that stamp duties on property transactions are determined by the provinces, which lag behind the different rates that the FBR sets on these transactions. Harmonising federal and provincial rates on property taxes is, therefore, essential to close gaps that encourage tax evasion.
According to an estimate, tax revenue generated from Pakistan’s real estate sector is around Rs200 billion, while a World Bank study suggests it could reach Rs600-700 billion in a comparable economy.
The federal and provincial authorities, therefore, must recognise the sector’s potential to boost revenue, not only by capturing fair values in transactions, but also by incentivising construction activities, which can stimulate local economies through job creation.
The consequent economic growth can eventually result in the expansion of the overall tax base as businesses and residents are attracted to newly developed areas. Thus, fully leveraging the real estate sector remains essential for enhancing Pakistan’s fiscal capacity and supporting sustainable economic growth.
Copyright Business Recorder, 2024