Budget 2018-19 had its pros and cons and a significant impact on the real estate sector of Pakistan. One of its most discussed highlights of the budget was that the previous government, in its efforts to regularise real estate and encourage people to file taxes, had restricted the non-filers from buying property valuing greater than PKR 5 million.
The premise was that people who are rich enough to buy property worth more than PKR 5 million should also be tax filers and taxpayers. The hope was that it would help increase the revenue for the government and, at the same time, increase the contribution of the huge real estate sector to the national exchequer.
On the other hand, the real estate stakeholders contended that this would add confusion to the real estate sector of Pakistan, slowing its growth when it has already been slow under the new taxation regime. What no one figured in to the equation was the confusion that it would cause among the overseas Pakistanis, even though they actually didn’t have to pay any new taxes under this – due to double tax agreements.
Overseas Pakistanis are special in that they are critically essential to the health of both Pakistan’s foreign exchange reserves and its real estate. Both of those are essentially related as well – a large amount of remittances to Pakistan by overseas Pakistan are, in turn, invested in the real estate. Remittances from overseas Pakistanis form one of the four sources of remittances to Pakistan and, in year 2017-18, remittances formed 40% of the inflows to the country. Incredibly, it is also the source of forex that has seen the highest growth in the last two decades – it grew by 19-20 times, as compared to Foreign Direct Investment (FDI) that increased by eight times.
So if confusion and hesitation existed among overseas Pakistanis, it was natural that remittances, and in turn, real estate and foreign exchange reserves, would suffer. It was not surprising then, in the above circumstances, when the Finance Minister Asad Umar stated during the mini-budget speech recently that the restriction on non-filers from buying property valued greater than PKR 5 million has been removed simply because it caused complaints from the overseas Pakistan.
This is bound to help the real estate market ease up as more money will begin flowing into the sector in the form of investments.
Tax regime on real estate still form a conundrum
While this one confusion has been resolved, there are several others that exist presently, causing confusion. The former finance minister, when he made the budget speech had announced that DC rates and FBR rates are going to be abolished and instead the values declared in the sale deed will be considered valid. However, to curb undervaluation of property, a directorate of immovable property will be formed.
Now the FBR rates have been theoretically abolished but the provinces have not abolished the DC rates, the Directorate of Immovable Property is yet to be formed. Confusion exists around the question of which of these values should be used and how the taxes will levied on them.
Some problems also exist around the issue of how declared values may compare against DC rates or even FBR rates. If someone had mentioned DC rates on their sale deed when buying a property, the difference between that and the declared, original value may be very high when selling it, artificially increasing gains counted towards Capital Gains Tax, potentially reducing any gains to nothing, or even turning them into losses.
These are some of the things that need to cleared before real estate can begin its rampaging growth again – something all of us wish. A solution could be to do what Sindh’s government has decided – to adopt the old system, scrapping the new measures and any confusions with it, however, that may only be temporary at best. What’s needed is a comprehensive explanation by authorities of how the things stand and will continue.
Do you have any confusions about the new tax measures, the budget 2018-19 and the recent Finance Bill amendments? You can talk to us in the comments section. You can also head to the Zameen Forum for a detailed conversation.