Flight of capital: relief package for real estate investors demanded

Pakistan Real Estate Industry Forum (PREIF) Wednesday demanded a relief package for the real estate investors to avoid flight of capital from Pakistan. Addressing a press conference at Karachi Press Club, Shaban Elahi, President and Ghazanfar Mehboob, General Secretary PREIF said after the official property valuation move by the government, overseas Pakistanis' investment in real estate has slowed down significantly and capital is shifting to other investment avenues such as UAE.
"The government must analyse the genuine practicalities of the real estate sector and adopt a balanced approach to regularise this sector," they maintained. "The government's recent decision to revise the official valuations of real estate is good in principle, however there is complete disregard for the problem described earlier. As a result, investors and builders who were engaged in a perfectly lawful activity, suddenly found themselves in a situation where they are unable to declare the source of investment because of past practices in the market," Shaban Elahi said.
Activity in real estate sector has virtually stopped and housing schemes are in danger of being abandoned. Around 50 affiliated industries such as cement, steel, paints, pipes and others are in danger of being impacted severely, he added. Elahi said with new taxation measurers, the government may fetch more revenue in the short-term, but this is partly due to deals made before July 2016 and partly due to very tax rates. However, in long-term, tax collection will come down.
In consultation with stakeholders and following a timely action, tax collection from real estate sector will increase by 500 to 600 percent and the number of tax filers will also increase significantly, he added. Briefing media about the background of the problem, he said that real estate transactions had been taking place at the Deputy Commissioner (DC) rates for many decades. The DC rates were not revised suitably keeping in view the rising rates of real estate. This led to a significant undocumented or grey economy.
"In short, this means that even if someone invested in real estate with declared money, his investment got converted into undocumented money. This practice majorly impacted taxpayer, small to medium investors and especially overseas Pakistanis, even though they acted 100 percent in accordance with the law," he maintained.
PREIF representatives suggested that for past transactions, a fixed tax may be introduced for existing property owners to declare the property at the Federal Board of Revenue (FBR) value, and pay taxes at 1 percent on the amount of difference between Deputy Commissioner (DC) value and the FBR value. This difference amount could then be added to the declared assets after availing such scheme and payment of taxes. Properties held for more than three years or more should be exempted from such taxes, they added
For future transactions, a fixed tax of two percent to be paid by the buyer of a property that is to be charged on the amount of difference between DC value and the FBR notified value. This differential amount could then be added to the declared wealth after availing the scheme and payment of taxes, they added.
"To prevent unnecessary speculation, a holding period of four months may be mandated to avail this. A time limit of two years may be imposed to avail this scheme. In the long run, this will eliminate the undocumented economy from the real estate sector and contribute significantly to the GDP," they said.
They suggested that the valuations in the FBR tables should be raised 10 percent on yearly basis till they reach market value. The tax percentage WHT, CGT, Stamp Duty, CVT must be reduced keeping in view the valuations that have been raised significantly. Previously, taxed were paid on DC values whereas they are now paid on much higher FBR notified values. Tax percentages should be reduced as this will lower the transaction cost and will result in far greater tax collection for the government.
In many areas, the FBR notified values are either higher than market values or very close to it. So the overnight change in valuation is too dramatic. This should be revisited and discussed with the relevant stakeholders of the areas, they maintained.
"If our proposals are accepted in a timely manner, stakeholders believe that the tax collection from real estate sector will increase by 500 to 600 percent and number of tax filers will increase significantly. Real estate sector will gradually rebound and will attract significant local and overseas investment. Construction and 50 affiliated industries will also be saved from disaster, and will flourish in years to come besides creating jobs opportunities," they said.
They said that with every passing day without taking any corrective measures, Pakistan is losing the opportunity for a rebound of this sector. Once a capital flight reaches high level, it might takes years or decades to regain investor confidence and bring them back to this sector, they added.
"We must save this sector from collapse and must not lose the opportunity of attracting investment from local and overseas Pakistanis. If the government gradually brings this informal sector of economy into mainstream, real estate would contribute even more to the economy of the country," they concluded.