Real Estate industry status in Pakistan
Real Estate Industry
Real estate sector should be given industry status in Pakistan, LCCI demands
The Lahore Chamber of Commerce and Industry (LCCI) has urged the government to declare real estate sector as an industry.
Real Estate industry status in Pakistan
It also demanded the government to not impose any new taxes on real estate sector as it is not only an important source of revenue for the government but is also providing direct or indirect employment to millions.
The demand was raised by LCCI President Sheikh Muhammad Arshad while talking to a delegation of Defence Housing Authority (DHA) Real Estate Agents Association, led by its Chairman Major Rafiq Hasrat at the LCCI.
The LCCI president said that real estate sector is an important and growing sector of economy and Pakistan spends billions of dollars on construction every year.
He informed the delegation members that LCCI is making all out efforts to solve the issues faced by the trade and industry at the earliest. The LCCI Industry has forwarded budget proposals to the government, he said.
He added that the ongoing projects under China-Pakistan Economic Corridor (CPEC) have a direct relation with the economic development and would also boom the real estate sector.
The LCCI president said that real estate sector is playing a significant role to promote the economic activities in the province. He said that the LCCI would extend maximum cooperation to DHA Real Estate Agents Association.
DHA Real Estate Agents Association Chairman Major Rafiq Hasrat said that the real estate sector could generate huge revenue for the government once it is declared as an industry. He said that government should establish a licensing authority for real estate agents which would also help trust building of the investors.
He informed the LCCI president that the association has designed courses for real estate agents to give them awareness about the day-by-day changing business techniques Real Estate industry status in Pakistan
Former LCCI president Muhammad Ali Mian, former senior vice president Irfan Iqbal Sheikh and Executive Committee Member Nasira Taskeen also spoke on the occasion Real Estate industry status in Pakistan.
Estate Taxes in Pakistan 2016-2017
Property Tax 2016-2017
During the past two decades, particularly in the years 2000 and 2008, many new investment opportunities were accorded to investors and overseas Pakistanis, which consequently brought capital in the country. The inflow of money noticeably enhanced the country’s foreign exchange reserves and assisted in maintaining the foreign exchange rate of Pakistani currency. The byproduct of this activity was a massive investment influx in new housing projects, universities, schools and other capital intensive projects.
The real estate industry, including the construction sector, is considered a prime catalyst for economic activity in Pakistan. This sector leads to job creation in a number of allied sectors, value addition in the supply chain mechanism of the related industries, as well as collection of substantial tax revenue. A visible outcome of development in this sector was an unprecedented rise in the value of urban and agricultural land prices.
This huge investment in the real estate sector under the existing tax laws had its own price to be paid in terms of providing safe haven to untaxed money, mushrooming growth of speculative files business, and allocation of capital to unproductive sectors. The government has tried to address some of these major concerns through changes in its fiscal tax policy.
Therefore, it is now important to discuss and assess the impact of the significant fiscal changes brought by the Finance Bill 2016, effective from the 1st of July, on the real estate sector. In order to help investors make an informed decision:
Advance Income Tax (adjustable) on purchase of immovable property under Section 236-K increased from 1% to 2% for tax filers and from 2% to 4% for non-filers
Advance Tax (adjustable) on sale of immovable property under Section 236-C increased from 0.5 to 1% for filers and from 1 to 2% for non-filers
Capital Gains Tax (CGT) has undergone two major changes in terms of time frame and fair market valuation of sale price, which are summarized below:
a) CGT will be levied at the rate of 10% of difference between the fair market value at the time of sale and purchase if the property is sold within 5 years of its purchase.
b) Fair Market Value: The Finance Bill has inserted a sub section in Section-68 wherein the concerned Federal Board of Revenue (FBR) officer can refer a certain property for its fair valuation to valuators approved by State Bank of Pakistan. To this effect, State Bank has already issued relevant notification along with its approved list of valuators. Secondly, the Finance Bill specifically mentions that the current Deputy Commissioner (DC) rates do not bind FBR to use it as reference for property valuation. It is important to mention that under the Income Tax Ordinance, Deputy Commissioner had valuation powers but due to certain reasons, these powers were inoperative and consequently DC rate was used and accepted by FBR as the sale price for any property.
The examples below would better illustrate the impact of above amendments especially those made in the CGT.
For the sale of a 1 kanal residential plot in DHA Lahore from Phase I to VIII, which was bought and registered in the last 5 years, with its current average market value of PKR 20 million, seller will be paying Capital Gain Tax as below:
CGT = 10% of Market Value of Plot (MVP) – Declared Value of plot (DVP) at the time of purchase
DVP (in last 5 years) = DC Rate Value at the time of purchase = approx 7 million/kanal (average DC Rate for DHA Lahore residential plots in Phase I, II, III, IV and V in the last 5 years)
So CGT = 10% of MVP (PKR 20 million) – DVP (PKR 7 million) = PKR 1.3 million
Also, remember that 1% and 2% Adjustable Advance Tax will be applicable on filers and non-filers respectively. For filers, it will be adjusted in terms of claiming credit when they file annual tax returns but for non-filers, it will be an additional cost of PKR 400,000 in the stated case. If Transfer Fees, CVT and Stamp Duty are added strictly as per the law, a minimum of PKR 2 million would be paid from July 1, 2016 onwards on the sale of every 1 kanal residential plot in DHA Phase I-VIII.
The question is, who will benefit from this new game plan of the government, and who will suffer disadvantages?
Primarily, these changes in the tax statute are supposed to take black money (the untaxed money that was invested in the real estate sector) into account. The transactions took place at the DC rate, which in certain cases, especially for commercial plots, was ten times less than the fair market value of the property. For overseas investors who have to bring in their money through banking channels, the change in law should not be a cause of worry.
As far as the doubled withholding tax rates on sale and purchase of property are concerned, it is being done primarily to increase the cost real estate transactions for non-filers. Overseas investors, on the other hand, can file their annual income tax returns and claim the credit in advance taxes paid in their annual income tax returns.
In Property Tax 2016 view of the above discussion, a downward correction or a breather thereafter in the prices of the overall real estate in the country is eminent. However, the major impact of all these changes will be observed on the black-money holders and their strategy to park their untaxed money in high-tagged assets that enable them to launder the black money.
Similarly, the changes are bound to have an impact on short-term trading as CGT has to be paid per the amended law. However, as elucidated earlier, this should not worry overseas investors or non-resident Pakistanis who can declare their sources of income as white money and are usually long-term investors. The only impact on the market would be a reduction in the value of their investments, however, that is merely a short-term effect, as the market is likely to regain equilibrium in the long run. It is expected that the market will grow slowly and steadily as and when the speculations tone down.
Property Tax 2016
Real Estate industry status in Pakistan,LCCI demands