Previous Government’s Tax Amnesty Scheme
The measures for real estate sector in the tax amnesty scheme was commenced by previous government introduced under the budget for 2018-2019. This move had been undertaken by the government to widen the already narrow tax-base, but many believed this won’t be able to achieve its desired outcome. The very basic purpose of the scheme was that the beneficiaries of the scheme who will declare their assets or income, they cannot not be asked about the source of the income that was used to create these assets. This was the basic purpose of the scheme. The problem is that in an ideal world, there should be no need of such a scheme where every taxpayer tells their real income and assets but practically we have a large undocumented sector about both, the domestic assets and the foreign assets. Therefore, the very basic purpose of the scheme was to give one opportunity to the people so that they could once declare the things that they did not mention in their tax record and so regularize so that they could save themselves from any kind of consequences. As per the tax amnesty scheme; the governments can take-over a property within six months of its registration by paying 100 percent over the registered price from the start of next financial year. This presumes no person would be registering their properties at less than 50 percent of its market value. Few analysts predict that this move would enable to document the economy and bring about a revolution in the real estate sector besides creating legal wealth in the country.
Need of Real Estate Taxation in Pakistan
In an ideal situation, within developing countries, the revenue contribution from property tax should have a share of one per cent or more in the GDP; while developed countries have a share of two per cent. Western European countries, United States, Canada and Australia on average collect property taxes close to two per cent of their GDP while various transition countries in Central and Eastern Europe and former Soviet Republics revenues from PT represents close to one per cent of their GDP.
In reality, real estate taxes in developing countries often yield under 0.1% of the GDP, and rarely more than 0.5%. But they can be more than 50% of local government revenues. While the potential of real estate taxes to strengthen national revenues is limited, the potential to finance improved local government services – local and government accountability and governance – is considerable. Many developing countries (including Egypt, Namibia, and Vietnam) have consequently embarked on real estate tax reforms. Thus, if Pakistan employs this tax revenue effectively within each respective provincial domain then there’s a chance that it can expand the overall tax base in the country.
These taxes can be used to produce advantageous results that can be used to finance services that would improve the property values and seen as a medium to pay for various services like local roads, sewerage, refuse collections etc. The efficiency of real estate taxes appeal to the location specific attributes that provide a relatively immobile tax base, less vulnerable to tax competition than others. With lower rates the inefficiencies from marginal increases are likely to be modest and their progress arises from the positive correlations between property ownership, income and wealth. Pakistan’s progress has been sluggish and incoherent and the latest reforms introduced have been largely difficult to administer. This can be ascribed to the fact that as with any economic agent, property tax is costly to administer in an effective way as the cost of maintaining a full roll of liable taxpayers and an effective system of valuation and revaluation are expensive. Secondly, as with many other taxes, property tax is hugely unpopular with taxpayers and elected local politicians in Pakistan. The ongoing trend reveals that realty sector in different cities such as Lahore, Gujranwala, Karachi and Islamabad are moving close to stability but this has been at a slow pace. However, with new tax regimes in place the effects are yet to be realized throughout the economy. Overall, with the increase in tax rates and the imposition of newer taxes, the costs for the firms would go up and hence cause an overall shift in the markets. Albeit the new tax regime introduced by FBR and proposals for the local governments seems to be counter-productive as a way of essentially declining transactions, however, in the long run they should be welcomed because as prices fall, the trading activity will eventually increase.
Real Estate Taxation under Budget 2018-2019
The Federal Budget 2018-19 seeks to institute tax reforms in the real estate sector. Widespread tax reforms have been envisaged for streamlining the issues related to the real estate sector. Property transactions shall be recorded at the value declared by the buyer and the seller. Property rates notified by Federal Board of Revenue (FBR) for the purpose of collection of taxes on sale purchase of property and DC rates are to be abolished. At the federal level, a one percent adjustable advance tax from the purchaser on the declared value shall be collected and this tax shall replace the existing withholding tax on sellers and purchasers of property.
Non-filers shall not be permitted to purchase property having declared value exceeding 4.0 million rupees. Provinces shall be requested to abolish the provincial rates for the collection of stamp duty commonly known as DC rates and to collect a total of 1.0 percent tax under stamp duty and capital value tax on the value declared by the buyer and the seller of property. In order to deter under-declaration and consequent loss of revenue, FBR shall have the right to purchase any property within six months of registration by paying a certain amount over and above the declared value which may be 100 percent in the fiscal year 2018-19, 75 percent in the fiscal year 2019-20 and 50 percent in the fiscal year 2020-21 and thereafter. In order to implement the above measures, enabling provisions shall be incorporated in the Income Tax Ordinance, 2001. Detailed procedure and the date of coming into force of the above measures shall be notified later.
Establishment of DG Immovable Properties
Federal Board of Revenue (FBR) on 30th November 2018 notified establishment of Directorate General Immovable Properties-IR in order to check valuation and tax evasion in property transactions. The FBR said that in pursuance of section 230F of Income Tax Ordinance, 2001 (inserted through Finance Act 2018) a new IR field formation namely DG IMP has been raised. The said section also provides definitions for all implied terms and expressions, the scope, operational mechanics and procedural parameters of this newly created tax authority and above all contains clearly spelled grievance readdressal mechanism for the aggrieved taxpayers. According to the notification by FBR the directorate shall consist of a Director General (DG) and as many Directors, Additional Directors, Deputy Directors, and Assistant Directors who will initiate proceedings against those people who will not disclose the purchasing and selling rate of their land. The Directorate General IMP-IR shall comprise of DG IMP based at Islamabad and 03 Directors IMP-IR i.e.; Director IMP-IR North, based at Islamabad, covering KPK, ICT and Civil Division of Rawalpindi, Punjab province and Director IMP-IR Central, based at Lahore, covering the whole province of Punjab except civil Division of Rawalpindi