When, if ever, will we see that happen?
Previously all transactions were taking place as per the DC rates but the actual sum of money was traded on market value … thus neither the government nor the tax authorities could understand the volume of transactions that were taking place.
Real estate regularisation is a phenomena by which the transactions taking place in the realty sector are properly documented and taxed. In Pakistan the real estate sector has operated as an informal sector for a very long time. However, this doesn’t entail that there was little or no activity, it has always remained as one of the most remunerative arenas for investment by offering Return on Investments (ROIs) of over 100% within a small time frame.
This kind of rapid activity is seen nowhere else in the world and is probably because of the informal nature of the sector and little done to give it proper structure. Resultantly, property prices were artificially kept high, a black economy was created, and tax base remained smaller. In order to correct this, measures had to be taken.
The need for these measures was further necessitated because property transactions in Pakistan have gone up by significantly. In order to foster further growth, the government needs to ensure that its policies are favourable to the sector. For this reason a number of reforms had to be introduced.
The law:
Earlier in May last year the government announced its budget for fiscal year 2016-2017 and with it came a comprehensive tax regime. These new set of taxes have called for a revaluation for DC rates, that had been removed from under the domain of provincial governments to FBR. This was announced because previously all transactions were taking place as per the DC rates but the actual sum of money was traded on market value. Thus, neither the government nor the tax authorities could understand the volume of transactions that were taking place.
To account for these transactions Finance Act 2016 was announced calling for all property valuations (previously under provincial government) to be done directly through FBR. This increased the tax rates (by insinuating two new taxes; Capital Gains Tax and Withholding Tax) and caused property transactions to go down by 85%. To correct the discrepancies that had been caused by these measures, an amnesty scheme was passed by the National Assembly in December 2016 as a means of documenting tax filers and increasing the number of tax filers. This wasn’t a welcomed move because a previous non-filer could, by paying only a nominal amount become a filer now which wasn’t received well enough.
However, this has remained as one of the most significant decisions. This is bound to generate revenues amounting to Rs.17 trillion which would bring in a lot of previous undocumented revenues, along with formalising an entire sector that has remained undocumented for a very long time.
A three tiered capital gains tax regime has also been announced in the latest budget for Fiscal year 2017-2018. This is bound to bring foreign investment in the equity market and not allow for a changing tax regime landscape to take its toll on the markets.
These measures have been received with scepticism and are seen as countering the greater aim of formalising real estate sector and documenting activity. However, in the long run these are bound to be fruitful and present themselves as sectoral reforms.