Property valuations and market rates

EDITORIAL: About time the FBR (Federal Board of Revenue) directed its field formations to increase property valuation rates to bring them closer to market rates.

It is now reported that the exercise shall commence next month. Property values currently only reflect about 75 percent of market value, but now they’re expected to increase to 90 percent of estimated market rates.

FBR has actually been looking for a mechanism to determine fair market prices of properties in urban centres since 2016. It’s previously adjusted market valuations four times – in 2018, 2019, 2021 and 2022. For some reason, a change in government prevented it from doing so last year.

But now, the revised property tables will be used to calculate federal taxes, including capital gains and withholding tax. This is important because till 2016, unlike the international standard, where tax was charged on transaction value, in Pakistan it was charged on the basis of valuation notified by district collectors whose value is significantly lower than the actual transaction value. And plugging this loophole was necessary to plug this yawning gap.

It’s very important to note, though, that contrary to popular belief it’s not just the real estate sector in itself that contributes to the wider economy, rather it is the development and construction activity within this sector that does. The myth that real estate triggers more than 40 different but related sectors like cement, steel, etc., is actually true for construction.

Unless and until construction commences, real estate is restricted to transactions in purely a speculation play; especially in countries like Pakistan where an under-developed capital market combines with a public largely uninterested in portfolio diversification to limit alternate investment avenues. That is why real estate ‘flipping’ is the favourite side business of Pakistanis all the way to the top of the food chain.

Regardless, authorities ought to move much faster to bring some of the big and protected sectors like real estate into the tax net in time to make a difference to the real economy. It’s already a travesty that the system allows misrepresentation of actual market property rates, and even now taxable values only represent about three-fourths of actual market rates. It’s this discrepancy, deliberately allowed and tolerated, that has created a powerful ‘property mafia’ over time; one that thrives on exploiting this gap.

Also, as stated earlier, the government must also encourage construction activities. The economy is caught in a tight, contractionary bind, especially because of the tough conditions of the IMF. And construction is one area that can kick-start a chain reaction that runs through numerous other sectors as well. It’s also very important to realise that there is a very small window, at best, to make and implement such decisions.

Very soon, the conditions of IMF’s EFF (Extended Fund Facility) will begin to bite. They are also likely to induce cost-push inflation and restrict people’s and businesses’ spending capacity. It’s best to incentivise growth activities before the economy gets locked into that downward spiral. And construction is the best way to create synergy between different arms of the economy to keep production and sales moving forward.

FBR is now under the microscope. How fast it moves on adjusting property valuation will be watched very closely. The government has so far been pretty short sighted when it comes to creating the extra revenue stream that the Fund requires. It, too, has but one chance left to hash out a better, more coordinated tax strategy.

Copyright Business Recorder, 2024