Another major reason for Govr surrender could be negligible tax collection in July due to virtual halt in property transfer cases.
A TV channel (24) program by Arif Nizami reported that " DHA Office me Uloo bol rahe hain" where there used to be plenty of hustle bustle even in scorching heat of Ramazan.
The situation faced by Govt was like "Na 9 man tel ho ga, na Radha nache gi..
@Shakoor. It is possible, but in my opinion the biggest reason why the govt has been forced to soften its rigid position is when they were "advised" about the likely repercussions of this measure on the financial system of the country. As always, our policy mandarins made this policy with a myopic view without realizing its knock-over effects. Just to give you a hint, almost all big loans extended by Banks are secured by property as a collateral. If the property prices "collapse", its not rocket science (at least not after 2008 global financial crisis) to figure out what will happen next.
I see the agreement being reached having two opposing effects on property. The proposed amnesty will calm the jittery investors who will not need to dispose off their properties in panic anymore,helping to maintain stability in the market. On the other hand, the application of revised evaluation mechanism to new transactions will certainly diminish the inflow of new black money in the sector which will limit the potential gains in the future. Future trajectory of the market will be determined by which one of these two effects dominates.
It is absolutely hilarious reading some of the comments above claiming govt have backed out of the new taxes and valuation!!
As usual a great strategy by the Govt in getting what they want and at the same time making everybody happy!!
For everybody's information, the new valuation is still there and even worse because now there will be fix table and no space for any manipulation! Past transactions will also be taxed(unprecedented move)! And 10% on any capital gain in future which with actual market value will be a big problem!
I agree with comments of property experts. Imposition of any tax in itself has never been a problem which the government has done in the past as well without any issues. The real issue was going after black money or giving safe legal cover. In the new agreement being negotiated, cosmetics have remained the same but the substance has been changed altogether.
Raza, In my opinion, govt is pushing for amnesty not as appeasement policy, but to bring un-disclosed property on wealth statements. If this comes through, will have far reaching effects. Apparently, builders/constructors have not picked this bait. But as negotiations are still underway so nothing can be said with certainty.
Very interesting blog, covers almost everything about this complex trap govt has intelligently laid to net the big fishes. Seems like Dar has checkmated the biggest mafia of this country.
Yes really interesting blog.
Regards
@Isloo1. I did'nt say they are doing it as a matter of appeasement, I said its only a response to the emerging scenario which could trigger far reaching and undesirable consequences. No government would willfully want to create an economic crisis during its tenure no matter how good the intentions are. A one time amnesty seems to be the only middle way out. It will serve the long term objective of documentation equally well. The recently announced amnesty scheme in India in response to Panama papers is one way of putting things right without triggering a crisis.
After all, blaming the investors alone seems unfair. All these years, FBR/Govt has been an equal partner in this undervaluation game by first issuing notifications which allowed such registrations and then accepting valuations at DC rates till now. I think government is going to show a mature approach and opt for a negotiated settlement.
This system is build by the Corrupt for the Corrupt. They are in cahoot with each other to make black money in first place. We were loser before by not able to declare all assets and we will be the loser after it by paying more taxes.Allah hi is mulk per reham kare.
Well even with amnesty, black market players are not stupid to paint target on their foreheads for future traps by FBR. They will keep most of their money parked until dust settles down. They have the cushion to wait, and they will utilise that option. For urgent smaller transactions, easy for them to bribe government officials to slip under the radars.
Biggest losers, will be dealers, and small investors who can't really work the system. And there is a huge number of these 2/3 property owners. So much so, that the actual volume of transactions per individual may be low, but on the whole considering thousands of these small time investors, will be very high. It is these investors and players which government is after, because they are small, present in huge numbers, and helpless.
Those small investors, which do not have urgent need to sell can hold their property, but that's precisely what will bring the prices down. Lack of activity in market reduces demand. Low demand hammers prices down. One may ask X for their property but would only get Y. So either sell at Y or hold till you can, and keep losing money.
About other avenues for investment, I foresee government jacking up interest rates in near future, because they are at their lowest, so the only direction is to go up. It's white, and the money goes directly to the government kitty, in addition to taxes. So as soon as interest rates intersect with property margins, people would rather move it those risk free investment schemes. Not long ago these investment schemes had overall rates very much comparable to what 80% of the property market was returning in 3 years horizon.
NATIONALISATION OF REAL ESTATE
ISLAMABAD: The Finance Bill 2016 brought an amendment to Section 68 (4) of the Income Tax Ordinance that requires determination of fair market value of property to replace the flat rate set by district commissioners.
Accordingly, the State Bank of Pakistan (SBP) has issued its panel of valuers, who will be charged with determining the real value of property and will be subject to approval of the Federal Board of Revenue (FBR) Inland Revenue administration.
Real estate set to win biggest tax amnesty
In the FY17 budget, the taxable period for capital gains on disposal of immovable property has been extended up to five years and a flat 10% tax has now been made applicable to the seller of the immovable property if he sells it within five years of purchase.
The law of property evaluation through the SBP-approved experts has been introduced presumably to curb speculation in property markets, discourage the whitening of black money and boost government revenue.
These are the intended consequences of the law, but let’s consider its unintended consequences.
Why investors speculate?
Speculation is part of the legitimate market activity, where speculators give a signal of buying when it is plenty and selling when it is short.
Speculators are autonomous responses to market fluctuations, though they may also cause these fluctuations. There has to be an excess supply in any commodity to attract speculation. In this case, it is the presence of surplus property files and vacant urban plots which attract speculation. This, in turn, is a function of bad zoning laws, which have pushed the cities horizontally instead of vertically.
In Pakistan, not only the bigwigs speculate, but everyone with even savings of Rs1 million does it through buying and selling property.
“Where else they would park their money if the business environment is not supportive, banks are giving loans only to the government and government keeps on increasing tariffs and taxes,” a fine point made by a Dubai-based Pakistani businessman Waliur Rehman.
Property market expects govt to take back controversial tax decisions
Thus, the debate should be on the real drivers of real estate market and not the symptoms. Government should not penalise investors for spotting the arbitrage.
Whitening black money
Suppose that suddenly all criminals and corrupt individuals stop their property transactions because of new laws. They need an outlet to stash their “ill-gotten” money, which resides in either cash or Benami accounts.
Its next likely destination will be forex markets, which will induce an upward pressure on the dollar, making it further appreciate against the rupee. This will most likely be shifted outside Pakistan and return whitened via remittance.
Once landed back, it will help stabilise and size up forex reserves – something which will be good for the current account but bad for trade balance, as exports will become dearer.
Therefore, it is better to let the black money remain inside Pakistan, as it is an externality of Pakistan’s legal system.
Govt revenues
In Lahore, properties are being transferred at rates of Rs2 to Rs8 million set by the district commissioners (DC), while market values of these properties are in the range of Rs12 to Rs30 million.
Govt may double tax on transfer of properties
Hence, on the DC rate evaluation method, the duties and taxes paid by the buyer were around Rs150,000 to Rs1.2 million, while the market rate evaluation method will increase these to Rs1 million to Rs3 million. Clearly, the government expects to make a windfall through the new valuation system.
However, there is a big assumption. Transactions will actually take place under new laws. While property speculation will be reduced, the transaction for even non-speculators will become costlier.
With additional duties and taxes slapped on property transactions, those wanting to buy property for their homes or businesses will be paying much more. Thus, the new law will penalise the legitimate buyers marginally more than the so-called speculators.
The Karachi Chamber of Commerce and Industry (KCCI) has proposed a better alternative – the prevalent DC rate system should be restructured and the changes in the DC rate can be made more frequent.
One demand should be added – the stamp duty and all other taxes on property sale and purchase should be drastically cut down. A combination of revision of the minimum price, lowered stamp duties and curtailment on Benami accounts will help create a win-win scenario for all the players.
Real estate in Karachi to stay unaffected despite budget proposals
As a result of the new legislation, three central government entities, which had no role in property valuation, have entered the marketplace. These are the SBP, FBR and Securities and Exchange Commission of Pakistan.
The mere thought of a sudden central government intervention in a market phenomenon is fearsome. It may be considered nationalisation of real estate market.
The consequences of nationalisation of businesses are well-established as anti-growth, anti-jobs and anti-economy. The case of nationalisation of property markets will be no different.
The writer is the founder and executive director of PRIME Institute, a free market think tank based in Islamabad
Published in The Express Tribune, July 25th, 2016.
Number 1 rule of a market in this situation, whoever gets out first loses least!! and whoever loses the least, WINS!
Short term file investment will pick up again.
Rehan sb…Sorry to say but i have noticed that time and again, you come up with a hilarious comment without any proofs and when someone tries you to engage in a logical discussion, you immediately run away…Your above comment is nothing more than a desperate statement to get something at low price… Those who have invested millions are not naive enough to throw their properties like this.No offence meant.
Dear Saadi_Aquarius, it looks you are reffering to me because someone just posted using same Id as mine. I don’t remember having posted anything of this type so far, except for a news item from jang which was just to get some feedback. I agree that this post by the person using name “Rehan” is plain dumb and silly. It might be work of the same gentleman who is going around this forum using so many IDs as I have noticed several warnings about him. Maybe he has run out of ideas for new names!
Sir my apologies if that is the case…Yes there is a slow down in sale purchase activity which was inevitable but prices are not down anywhere Sir…
I agree with you to some extent. I am myself exploring options as I will need a house 2-3 years from now. Presently I am residing overseas. I have checked Bahria market. There is hardly any change in plot price but there is some better bargaining choice if I go for ready house but that is not my first option.
You are right Sir…My sincere advise to you wold be to go for a plot and construct it yourself…It would be much beneficial for you.
Market will settle soon in sha Allah so hold your investment.
Regards
How much tax on 10 marla and 1 canal?