Property under-valuation to create problems for provinces: analysts

The longstanding trend of under-valuation of immovable property will create serious problems for provincial governments for proper collection of capital value tax (CVT), stamp duty and other local levies during 2011-12. Analysts told Business Recorder here on Monday that the Federal Board of Revenue (FBR) has transferred powers to collect CVT on immovable property to the provinces.
Consequent upon amendment in the Federal Legislative List of the Constitution through 18th Amendment, federal government is no more empowered to levy/collect CVT on immovable properties in provinces. Therefore, through an amendment in CVT law, brought about through Finance Act 2010, capital value tax rates applicable on immoveable properties were omitted.
According to sources, currently gross under-valuation of properties has resulted in massive evasion of CVT and other provincial levies. There is an immediate need for enhancement in the existing valuation benchmarks for proper collection of the CVT. At present, the provinces determine value of the property on the basis of the 'DC Rates' (valuation rates) applicable at the level of each provincial district.
Every provincial district has its own 'DC Rates' which forms the basis for the valuation of the immovable property. Due to lower 'DC Rates' in provinces, the valuation of property has been carried out at low rates, which ultimately results in low collection of the CVT as well as the provincial stamp duty. The provincial governments would need to enhance the 'DC Rates' on the basis of market value of the property for accurate valuation purposes.
According to sources, lower valuation of property also results in concealment of income tax. If a property has been under-valued, it would impact on the assessment of income tax as well as calculation of income from different sources including rental income and buying/selling of property. The under-valuation of property would result in wrong assessment of income tax due to declaration of very low value of the property as compared to its actual market value.
In case the 'DC Rates' are increased, it would result in proper valuation of property resulting in accurate assessment of income tax. Sources said that higher rate of CVT is also one of the major reasons for under-valuation of properties. The rate of CVT should be reduced from 4 percent to at least 1 percent, which is presently levied on the purchase of the immovable property.
The rate should be rationalised and should not be more than the stamp duty rate applicable at provincial level. The CVT rate should be so low that the people are lured into declaring the actual value. At the same time, the "DC rates" should be reviewed on annual basis to avoid under-valuation of property. In case the provincial governments want to continue with the higher rate of 4 percent CVT, there should be some kind of tax credit for encouraging compliant taxpayers. Credit should be given as an incentive to those ready to pay the higher rate of the CVT on market value.
CVT must be applied on the value of the "DC rate" or declared value of property, which ever is higher, sources added. When the CVT was within the purview of the FBR, the tax authorities had repeatedly requested the Chief Secretaries of all provinces to take measures for enhancement of the properties valuation benchmarks and documentation.
The valuation of properties for the CVT is based on the valuation rates/benchmarks notified by the provincial governments and property valuation thresholds established through provincial valuation tables have been rendered far below the prevalent market values as these tables have not been revised upward to bring them to the level of market prices. This is resulting in revenue loss which requires revision of valuation rates/table urgently to check these losses of revenue.
Experts said that when the FBR doubled the rate of the CVT on immovable property from 2 percent to 4 percent, revenue collection declined. The FBR had envisaged tax collection of Rs 15 billion with the imposition of four percent CVT on land transaction in 2009-10 compared to the collection of around Rs 3.5 billion in the financial year 2008-09 with two percent CVT.
Sources said that the FBR had suggested to the chief secretaries of the provinces to double the rates used to determine the value of fixed assets such as land, houses and flats. Another expert said that since the CVT on immovable property has been transferred to provinces, the amount of collection made by the provinces under the head of the CVT during 2010-11 is yet to be seen.