LAHORE: Pakistan’s real estate markets will continue to carry on with their business as usual, despite the fundamentally tumultuous proposals announced in the new budget.
The underlying reason for the seemingly nonchalant attitude is most likely how the system is designed – understating property values with no mechanism in place to correct it.
In the new budget, Finance Minister Ishaq Dar proposed innovative taxes for the real estate market, while scaling upwards the taxes already in place. For instance, a capital gains tax of 10% was proposed if the property is sold within five years of purchase. Meanwhile, withholding tax on sale of property was increased from 0.5% to 1% for filers and from 1% to 2% for non-filers. Similarly, withholding tax on purchase was increased from 1% to 2% for filers and 2% to 4% for non-filers.
However, the new proposals will only take effect if the prices of property exceed Rs3 million. The price of the land, however, is not the same as the market value at which these properties are traded.
The value of land, in the on-going scenario where government officials have been unable to keep the official records updated, is estimated by means of [calculated] conjecture by the deputy commissioner’s office (DC). This DC value has not been updated for much of the country for a number of years, and remains to be even considered for revision in a city like Karachi, according to property dealers.
Despite many residential plots values hovering around tens of millions of rupees in Karachi, the DC value lists many of them in hundreds of thousands of rupees. The discrepancy means that Karachi remains largely unaffected from Ishaq Dar’s proposal.
For the plots whose DC value exceeds Rs3 million, it would still be comparably little vis-à-vis the market price, so 1% or 2% of DC value pales in comparison to similar proportional taxes applied on their actual value.
“The proposed tax will not affect the Karachi market as it will be levied at DC rates which are much lower than the current land prices. The real estate market of Karachi is escalating rapidly and we are unable to satisfy our clientele’s requirements due to short supply and massive demand,” said Ajay Khatwani, a Karachi based agent while talking with Tribune.
The discrepancy between DC rates and market values extends to other cities as well. But recently a drive launched in Punjab, largely focused in Lahore, aims to revise the DC prices of several plots and bring them closer to the corresponding market values.
This is primarily fuelling the ire of real estate agents who say that they’ll have to pay significantly higher taxes, which adds to the cost of a transaction, deterring many investors from venturing into real estate transactions.
“Average DC value of DHA plots has been revised to from Rs2.2 million to Rs4 million recently, and we are expecting another hike that would probably push their DC value beyond Rs6 million,” said Abdul Ghafoor, CEO of Pak Properties.
If the second wave of appreciation were to go through, it could increase withholding taxes on transactions by over 170%, and if the withholding taxes were to be revised upwards as per the new budget’s proposal, the increase could exceed 440%.
Up till this point, much of the transaction cost taken into account consisted of withholding taxes, however, imposition of a 10% capital gains tax also remains to be configured.
Capital gain occurs when a real estate’s value appreciates, so a capital gains tax tries to procure a cut of the profit from the real estate trader.
Currently when property is traded, land seller has to pay 0.5% capital gains tax if he’s a filer and 1% for non-filer, given that the property is sold within two years of purchase. Furthermore, buyer pays advance income tax of 1% in case of filer, and 2% for non-filer. This means that for a hypothetical trade where Rs4 million property changes hands, which was revalue upwards from Rs2 million, these costs could add up to Rs100,000 for non-filer.
Under the new regime, however, these costs would add up to Rs280,000, up by a precipitous 180%. Even this computation does not take into account withholding taxes, which could increase the aggregate cost to Rs520,000 from pre-budget cost of Rs220,000.
Not the end
However, that is not all. “These are so many other taxes, such as the federal taxes, provincial taxes and Society transfer fees….,” said Waseem Tariq, CEO of F-1 Properties, a Lahore based agency.
On a similar note, Tariq warned that even imputing these costs would not provide a complete picture of the ballooning cost of a real estate transaction, since provincial taxes are expected to increase the costs further.
“Provinces are charging taxes in shape of 2% CVT and 3% stamp duty, and we are expecting the increase in these levies too in the new provincial budgets,” Tariq said.
It remains to be seen whether such measures will prove to significantly damper the real estate market, but real estate dealers are already worried that it would significantly curb speculative trading, at least in the official channels.
“People will make alternate agreements to avoid heavy taxation, this will result in increased cases of fraud and strengthen the land mafias, already active to exploit the masses,” Ghafoor added.
The writer is a staff correspondent
Published in The Express Tribune, June 13th, 2016.