Real estate agents express concern over absence of coherent mechanism for property valuations

The hullabaloo caused by Federal Board of Revenue’s (FBR) decision to increase the deputy collector rates seems nowhere near dissipation. The real estate sector is facing a downward spiral as transactions have fallen by a staggering 80 per cent, according to real estate agents. This, in turn, has led to an average fall of 15 per cent in prices of residential plots while a 30 per cent correction has been seen in commercial property prices.

“This is not how you bring tax reforms or valuation reforms in a country,” said a disgruntled real estate agent, Major Waseem of Delta Estates. “You should take all the stakeholders on board and introduce reforms gradually so as to avoid any backlash.”

He further said the plan had backfired and the government earned a hundred billion rupees in revenue prior to this new development, now they are earning a meagre ten billion rupees.

Senior officials from FBR conceded on condition of anonymity that revenue from real estate sector had reduced significantly after the valuation by FBR. However, they remain optimistic that the market will soon recover and allow the authorities to bring the FBR’s property value at par with the market value in three years’ time. Market sources, however, beg to differ.

“We are expecting the values to fall even further unless the government revises its policies,” said Javed Iqbal of Estate Business, a local real estate company.

At the moment, properties carry three different values, which include market value, FBR notified property value and provincial DC rate value. The market value of the property is the highest, while FBR’s value is less than the market value but higher than the DC rate value.

The government announced in the fiscal budget for 2016-17 that properties in Pakistan were majorly undervalued and sought to revise the valuation in 21 big cities of Pakistan, majority of which are in Punjab. The DC rates are as low as being one-fifth of the market value.

A team of officials from FBR were assigned to carry out the task in consultation with the real estate agents and other stakeholders after the State Bank of Pakistan withdrew from the responsibility of assigning new property values. The new rates were published on July 31. However, provincial tax authorities did not change their DC rates.

Six different taxes are currently imposed on properties in Defence Housing Authority (DHA): Advance Tax, to be borne before the transfer of a property is made; Capital Value Tax (CVT), levied on the property after completion of transfer; Stamp papers’ duty; Cantonment Tax; Capital Gains Tax (CGT); and Punjab Revenue Authority’s Tax.

Of these, Advance Tax and Capital Gains Tax are collected by the federal government and therefore levied upon the FBR’s property values whereas the rest are collected by the provincial government and therefore levied on the DC rate value.

In doing so, a clear disconnect has emerged between the values used for different tax heads. Tax rates for non-filers are twice the tax rates for filers.

In addition to the increasing the property rates, FBR has also increased the percentage of tax rates imposed, thereby increasing the cost of doing business dramatically. Capital Gains Tax is to be levied at a rate of 10 per cent if the property is held for less than a year, 7.5 per cent if the property is sold within two years, and 5 per cent if the property is sold within three years. After three years, 0 per cent of tax is levied on the property.

Prior to July 1, immovable properties were taxed at 10 per cent for the first year, 5 per cent for the second year and 0 per cent after two years, under the head of CGT.

In the wake of recent developments, the number of transactions has fallen and the biggest victims are the real estate agents themselves, who have lost their income from commissions.

Talking of DHA, in decreasing order of importance, people who own files of plots have lost the most, followed by those who have properties in areas where development is ongoing, and lastly, the least hurt are those who have properties in developed phases.

FBR went a step ahead in order to rope in those who have stashed black money in real estate by demanding to know the source of money from each buyer.

Property rates (DC) that existed prior to July 31 were significantly lower than the real market value, thus buyers had to show white money equivalent to the DC rate value. This has changed now. Buyers have to show white money equivalent to the new FBR rate value which is higher than the DC rate value.

“People are unsure whether they have to show white money equivalent to the DC rate or the FBR value rate,” said Waseem. “This is the major driving force behind the prevailing market uncertainty.”

According to Waseem, billions of rupees are being sent abroad each month since the new regulation on property values was brought into effect. The paucity of buyers in the market is forcing the prices downward, while the looming threat of being caught with black money is the major cause of the shortage of buyers in the first place.

Real estate agents are pointing towards the government and saying that the lack of a coherent valuation mechanism is brewing uncertainty in the sector.

Another reason cited by the real estate players is that the last few tranches of the IMF loan this year must have been secured on the premise that tax reforms in real estate sector will be implemented.

“They must have shown fancy, inflated figures to convince the IMF that the government will be able to pay back by way of increased direct taxes in the real estate sector,” said Waseem.