The controversial real estate law

The federal government through an amendment in the Income Tax Ordinance 2001 passed a bill in the National Assembly to tax the real estate sector on the basis of fair market value of immovable properties to be determined by Federal Board of Revenue (FBR) instead of valuators approved by State Bank of Pakistan (SBP). This change was warranted by a variety of reasons as stakeholders in this sector were unhappy with the situation and provincial governments had shown no appetite to raise the Deputy Collector (DC) rate closer to real market value. Therefore, FBR held a series of meetings with stakeholders in the real estate sector and came to the conclusion that it must retain its exclusive jurisdiction to determine the fair market value of immovable property for tax purposes. And, once the new owner of the property has paid the advance tax @ 3 percent on the difference between DC value and FBR valuation to bring the property in the book of accounts. This 3 percent advance tax is not adjustable. It is being claimed by the government that the law removes ambiguity and brings transparency with regard to fair value of a property; and it also serves the objective to promote documentation and generate fair and due revenue streams for the state. We think not.
All this would do is to whiten the black money parked in real estate and earn some additional revenue for the FBR to come closer to its target fixed for the year. Strangely, under the new law, even white money is non-adjustable. The fate of the new law would not be different from the retail tax's which only increased the number of non-filers in the system.
Taxation has to be thought holistically. Our present tax system is a like a sieve. Without an efficient, reliable and user-friendly automation system it is not possible to tackle the complex issue and bring transparency in the FBR system. And, also bring confidence in the FBR working in order to minimise leakages and fraud of tax and provide confidence to honest and willing taxpayers; broaden the tax base and minimise personal contact.
Without compilation and integration of data available within the database of FBR all transactions conducted or expenditure incurred need to carry CNIC details which in turn need to be converted into National Tax Numbers (NTNs) or company registration numbers, etc. This will enable reconciliation of data compiled with the information available within FBR in the shape of withholding statements; return of income and purchase/sale summaries of sales tax returns with SECP data bank with listed companies distributed dividends; with banks and National Saving Centre for distribution of profit and vehicle registration authorities, with bourses of sale and purchase transactions of shares; linkage of immovable property registration authorities for sale and purchase of properties, etc. All this requires software and Computerization; until and unless we do that we will not be able to unearth new taxpayers and tax the untaxed income.
It also requires separation of regulatory and implementation functions of FBR, ie, tax appellate authority as prescribed by constitution by removing the adjudicating officer from subordination of FBR Commissioner (Appeals). Collector (Appeals) be appointed; he should directly work under the oversight of High Court. The officer once transferred to appellate tribunal for the balance period of service - without an option to come back to parent department. Tax machinery under the executive side is an obvious impediment towards providing fair and quick justice to a harassed and bona fide taxpayer.
FBR needs to be an implementing board under the Ministry of Finance (MoF). It should be relieved from performing the role of a regulator. An independent Pakistan Revenue Regulatory Authority be constituted which shall make laws for revenue generation and report directly to the Prime Minister. It could comprise five or six professional members - three economists, one lawyer and two being Chartered Accountants. The issuance of bearer investments such as prize bonds be discontinued; these may be issued by name. And, DC rate be enhanced by provinces close to market rate with lowering of stamp duty.
The new law itself allows a fair market value to be the FBR rate. Provinces should not be made to suffer. Retail and wholesale taxes be collected by them for the Centre against a collection fee. Traders and middlemen (Arthies) related to an agriculture produce as well as transporters should be paying tax on the real income basis instead of a flat rate. Only then will we be able to collect revenue to its fullest potential.