When the Prime Minister unveiled his economic reforms package on 5 April, 2018 one of the components was a major initiative to correct the valuation of real estate for the purpose of taxation. However, when the Ordinances were issued to give effect to the package, real estate initiative was missing. This has finally been included in the budgetary proposals.
Through the Finance Bill 2018, the Government has introduced a new section 230F to the Income Tax Ordinance 2002. The sub-section (1) provides for the establishment of a new directorate general of immovable properties (DG-IP). This new office will be endowed with the necessary capacity and legal jurisdiction to establish and implement a framework for taxation of immovable property. Sub-section (3) empowers the directorate to undertake proceedings for acquisition of property for reasons and purposes enumerated in sub-section (4).
Given its significance, let us reproduce sub-section (4): The proceedings under sub-section (3) shall be initiated, where the Director General, on the basis of valuation made by it, has reason to believe that any immovable property of a fair market value has been transferred by a person, hereinafter referred as transferor, to another person, hereinafter referred as transferee, for a consideration which is less than the fair market value of the immovable property and that the consideration for such transfer as agreed to between the transferor and transferee has been understated in the instrument of transfer for the purposes of - (a) the avoidance or reduction of withholding tax obligations under this Ordinance; (b) concealment of unexplained amount referred to in sub-section (1) of section 111 representing investment in immovable property; or, (c) avoidance or reduction of capital gains tax under section 37.
The valuation mechanism (appointment of valuator and its working), is specified in sub-sections (5)-(7). Sub-section (8) restricts the period for initiations of proceedings within six months of the transfer of immovable property. The manner of proceedings, opportunity to be heard for transferor and transferee and making of the final order for acquisition of property are the subjects covered under sub-sections (9)-(11). The appellate procedures against the orders of the DG-IP are specified in sub-sections (12)-(18).
If the order of DG-IP, made under sub-section (11), survives challenges in the appellate forums, sub-section (19) declares that the immovable property and all rights including ownership rights thereof shall be vested in the Federal Government with same rights and enjoyments as would have persisted under the previous ownership. Sub-section (20) makes the provision for payment to the owner of 'consideration for acquisition', which is defined in sub-section (21) as twice the price at which the transferor and transferee have executed the transfer of property being the subject of proceedings.
The above, then, is the scheme designed for reforming the distortions in the valuation of immovable property. In what follows, we would comment on the constitutionality of the above scheme and its practicality without the expressed approval and participation of the provincial governments.
First, let us look at the constitutional position of the immovable property as a subject and taxation connected therewith. Under Federal Legislative List [Article 70(4)], the entry number 50 reads as: Taxes on the capital value of assets, not including taxes on immovable property. Curiously, before the 18th Amendment, after the words 'not including taxes' the words 'capital gains' were appearing. These words (capital gains) on immovable property were excluded since those became superfluous after excluding taxes on immovable property. The upshot of this discussion is that the subject of immovable property vest in the provinces and the federal government's taxation authority does not extend over immovable property. However, income from the property remains the subject of the federal government, including, that of capital gains as well.
Second, all matters connected with the acquisition, sale, purchase, transfer, gift registration, disposal etc. of immovable property are within the domain of the provincial governments. When the owner of the property fulfills all the obligations within the framework specified under the provincial laws for dealing and disposing of the property there would be serious legal issues in case the Federal Government attempts to assail such transactions, like the manner in which it is proposed in the Finance Bill.
Third, the valuation of immovable property is done by the deputy commissioner under the provincial laws enabling him in this behalf. Without synchronizing the valuation with the primary authority, a major legal glitch would arise that would be detrimental to the working and growth of the real estate market. Worse still, the capital value tax (eg in Sindh) in the province and other levies would be using the valuations of DC for fulfilling provincial tax obligations. There would, therefore, be confusion and disruption in the immovable property markets.
Fourth, the proposal runs counter to the fundamental scheme contained in the income tax law. The aim of the Federal Government is to make correct assessment of fair value of the property for the purpose of raising tax demands. There are several provisions in the Ordinance that allow commissioners to significantly alter the assessed income compared to that declared and assessed by the taxpayers. The final tax demand is based on department's assessment of the income. Obviously, if the taxpayer disagrees with the assessment he has a number of appellate forums including the superior judiciary to contest the department's demand. If the department's demand is sustained across all forums, the taxpayer is liable to discharge it. In case of failure to pay, a question of attachment of taxpayer's properties and other assets would arise, which would be open to auction to realize the demand. The interest of the department in the liquidation/auction of properties and assets is only to the extent of its undischarged demand.
Evidently, the proposed scheme introduced in the Finance Bill 2018 is contrary to the general scheme spelled out above. The notion of acquisition of property by the federal government - having been transferred in full compliance with the provincial laws - for failure to disclose the fair value of property, is a novel idea, which may run contrary to the constitutional guarantees available under Articles 23 and 24 of the Constitution for the protection of private property.
Fifth, there would also be some intractable issues with respect to actual acquisition, availability of budgetary allocations for such acquisition, maintenance of properties during the holding period until disposal and auction for realization of property value. The way the property market works there is no guarantee that values would not face adverse variations just as it happened with the onset of the global financial crisis of 2008.
In view of what is stated above, we acknowledge that the aim of correcting the valuation of properties is highly desirable. However, given the dichotomy between federal and provincial governments with respect to matters connected with the subject of immovable property, it would be impossible to bring a workable system unless it is fully coordinated among all governments. The federal government needs to undertake consultations with provinces and then place the matter before the Council of Common Interests (CCI). A scheme where all stakeholders agree on the nature of the tax, manner of collection and basis of valuation would succeed in meeting this fundamental challenge to country's tax system. The proposed law, since it preempts these consultations, should therefore be withdrawn for necessary consultations with the provinces and deliberations by the CCI before approval of the National Assembly.
(The writer is former finance secretary)
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