The Federal Board of Revenue (FBR) has raised property valuation rates again, taking effect from Nov 1, 2024. As dubbed officially, the new property valuation 2024 has been taken to bring property valuations closer to market rates. But as reported, according to an unnamed FBR official it is “with intentions to shift cash away from real estate into productive sectors”. At this time, when the real estate industry is in the state of inertia, it is difficult to say whether this step will boost revenue collection shifting the cash away from real estate or not.
New Property Valuation 2024
The FBR had previously adjusted property valuations four times in 2018, 2019, 2021 and 2022. Initially the valuation table of immovable properties only catered major urban cities, and then gradually it had been expanded to more cities in the country. This latest revision is “moderately revised upward” overall affecting 56 cities, besides further covers 12 new cities, including low-density areas like Bannu, Chiniot, Kotli, Sattian and Ghora Gali. Property values in certain locations have been raised to approximately 75% of the current market rates.
There is no doubt, unlike in many other countries, where taxes are based on the transaction value, in Pakistan, the declared collector value is often significantly lower than the actual transaction price. A World Bank study estimates that real estate transactions in a comparable economy to Pakistan could generate between Rs. 600 billion and Rs. 700 billion in tax revenue. However, the FBR tax official estimated Pakistan`s actual collection to be roughly Rs. 200 billion. Determining true transaction values has been a challenge for the FBR, keeps it pushing to increase the property valuations since 2016 across Pakistan.
These revised valuations will be used to calculate federal taxes such as Capital Gains Tax (CGT) and withholding tax. While, the government already implemented several tax measures for the real estate sector in this year budget via Finance Bill 2024.
Taxation under Finance Bill 2024
- The Finance Bill 2024 proposed a 5% federal excise duty on Transfer of Commercial Property, First Allotment or Transfer of the Residence.
- Advance income tax on purchase under Section 236K and on sale under Section 236C, has been imposed on property values, varied from Rs. 50 million to Rs 100 million and above.
- The Finance Bill 2024 further revealed a flat 15% rate of tax on gains from the disposal of immovable properties.
- The FBR also collects withholding taxes under Sections 236C, 236K and 7E of the Income Tax Ordinance.
- While provinces have also raised District Collector (DC) rates for property transactions.
However, raising property valuations and higher taxation measures are one thing. While approach to “shift cash away from real estate” is different, which is disturbing and alarming. To a certain extent, it means dissuading people from doing real estate business and investing in it.
Dissuading People from Real Estate:
According to the Pakistan Bureau of Statistics, Pakistan’s real estate sector is worth around $1.8 trillion. While construction output accounts for 2% of GDP, with housing representing less than half that total. Pakistan has a housing demand of 10 million units but faces a supply shortfall of 4.5 million units. Government policies in Pakistan’s real estate sector, therefore, should be making a balance between revenue collection and fostering sustainable growth. And, any plot to sudden shift of investment away from real estate will collapse the construction industry, resulting in vast unemployment and GDP’ shortfall.
Furthermore, Prime Minister Shahbaz Sharif called the real estate a “non-productive sector”. Therefore, his government policies aim at redirect investment into more productive sectors of the economy. Well, providing housing to unsheltered cannot be taken as non-productive. Shelter is one of the fundamental rights of every human being besides food, clothing, education, health care and transport.
Rather dissuading people from real estate business, the government needs to streamline and regulate real estate sector. These include reducing interest rates, stabilizing the political environment, and liberalizing tax regulations. Besides, making the Real Estate Regulatory Authority and facilitating Real Estate Investment Trusts is the need of the time, which will not only digitize the real estate sector but also broaden the FBR tax net.
Hope sanity prevails in the policymakers’ corridor.
By
Editorial, Infocus
