Property valuation – two steps back

The recent decision on property valuation depicts just that. The policy reversal came with the federal government slashing property valuation rates by up to 57 percent. This comes as a surprise after the government took the bold decision of documenting and taxing the real estate market in 2016.

For a refresher, recall that the Federal Board of Revenue took on the responsibility to bring DC rates in line with the fair market values through an amendment in the Finance Act 2016 that took away the provincial governments’ rights to notify property prices. At the same time, it also increased the Capital Gains Tax (CGT) from 5 to 10 percent; and Withholding Tax doubled from one to two percent for the filers, and from two to four percent for non-filers.

The second round of revision in property valuation was scheduled for July 2017 where increase of around 30 percent was being talked of. However, after a delay of six months, the FBR has moved into a completely opposite direction by decreasing the valuations of properties including Karachi, Lahore, Islamabad, and Peshawar by over 50 percent on average.

When it was first decided to simultaneously increase property valuation and taxes, BR Research had also indulged in the discussion over the confusion whether the primary reason of the concurrent steps would be to increase tax revenues or to arrest the trend of black money routing to the real estate. Looks like the government had little intention to actually address the latter and now has compromised tax revenues over pleasing some notables.

The reduction in valuation is not only a blow to the attempts to control whitening of black money, but also to the tax revenue collection. The move also seems anything but logical as the valuations have been decreased for six big cities and that too of some of the big residential areas.

And while these challenges are no less, the move by the government is also a step back to making the regulatory environment for foreign investors smoother. While the print media has been highlighting the increased foreigners’ attraction towards Pakistan’s real estate sector, these investors have to go through complicated regulatory process, which continues to be a great inhibitor in attracting foreign investment.

In a recent conversation with BR Research, Muhammad Arif Yousuf Jeewa, Chairman ABAD highlighted this by saying that the foreign investors are coming and then leaving because of our complicated regulatory environment in the real estate sector, which eventually boils down to three different valuations that the investor has to deal with:

The DC value, the FBR determined rate and the market value. He further highlighted that it is virtually impossible for investors to function with different valuations for one investment; and when they go into audit, they cannot explain the ambiguity.