In an effort to provide relief to the people, the government decided to reduce the Capital Value Tax (CVT) from 4 percent to between 2 and 3 percent depending on the size and type of property.
Not only this, the Sindh government-with new taxation powers bestowed upon it-also reduced the stamp duty from 3 percent to 0.5, 1 and 2 percent.
This move was initiated in order to increase tax revenue and boost the real estate sector. In addition, the government also encouraged the formation of Real Estate Investment Trusts (REITs).
An interesting paradox, however, is that despite the falling tax rates, the property and real estate market has remained bearish.
A glance at the property valuation table issued by the Excise and Taxation Department of Sindh solves this mystery. Valuations of property have been raised by up to 300 percent in some zones in Karachi, according to Raja Mazhar-ul-Haq, president United Defence Clifton Estate Agents Association (UDCEAA.),
So, the government may have reduced tax rates, the amount of tax paid in absolute terms is actually higher because the reduced rate is applied on raised property values. For example, where a property valued previously at Rs3 million paid Rs0.12 million in taxes previously, now pays a minimum of Rs0.18 million in taxes after being valued 3 times as much.
While this may seem unreasonable on the surface, the fact is, property valuation had not been changed for the past five years and such an increase only seems justified.
Abdul Samee, senior vice-president UDCEAA told BR Research that the unwarranted increase across the city, and up to 100 percent in other cities of Sindh, such as Hyderabad, Sukkur and Larkana, is uncalled for.
Industry participants are a trifle exasperated at the governments move claiming that the drastic revision in tax rates and property valuation not only hurts realtors, but also the 140 industries involved in construction.
While it is true that property valuations should have been increased in phases, the hue created by the real estate agents is uncalled for since even revised valuations are far less than the prevalent property prices.
Realtors also protest that the system is not good enough and neither has the community been educated to effectively work with such a mechanism.
Yet they do seem to agree to the idea of registering agents and suggest depositing an annual fee from them, protecting them in cases of fraud and dishonesty.
Interestingly enough, smaller realtors were ignorant of any such development.
Sindh, on the other hand, has been under tremendous pressure from the centre to bridge the budget gap, and so is bent upon increasing its revenues. Previously, stamp duty collections missed revenue targets by almost 50 percent.
The onus now is on the Sindh government to firstly, not succumb to the protests being planned by real estate agents, and secondly, to educate realtors ensuring that all trade in property is documented and hence taxed.
Hiring private valuators for property valuation may also be a feasible step that the Sindh government may impose in order to pacify the realtors.
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