Real estate sector

The National Assembly Standing Committee on Finance approved the grant of a one-time amnesty for the real estate sector in spite of opposition by the country's tax collecting entity, the Federal Board of Revenue (FBR). It is unfortunate that no tax amnesty has ever been a success in Pakistan either in terms of generating significantly higher revenue or enhancing documentation as projected. The reason: to be effective the grant of a tax amnesty must be perceived to be a one-time affair that is not periodically reintroduced as has been the case in Pakistan. In this context, it is relevant to note that during the three and a half years of the Sharif administration alone two amnesties were granted - one relating to an amnesty couched as an investment package in 2014 and the other that was trader specific. The International Monetary Fund (IMF) in its second mandatory quarterly staff review with reference to the first amnesty under the recently completed 6.64 billion dollar Extended Fund Facility noted that: "the package opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment, and raises potential money laundering risks. Immunity from routine audit hinders the self-assessment process and the amnesty - entailed by waiving penalties and interests - is likely to be detrimental to improving compliance and collections as taxpayers will develop an expectation of future immunities."
The new measures being resisted by these stakeholders include evaluating the value of the property not as per the rates notified by the District Collector, that all are agreed are a very small percentage of the actual market value of the property, but to be determined by either the State Bank of Pakistan or the FBR-led group in all major cities. The real estate sector does not pay much tax to the FBR in any case so there is no loss of major revenue to the centre as a consequence of cessation of transactions; however, provincial governments do charge a stamp duty on all real estate sales/purchase but they too are silent on the issue which indicates their tacit support for the federal government proposals. The reason could be their awareness that their current earnings under this head are a very small percentage of what would be generated if this sector began to pay taxes on the basis of actual sale/purchase price.
This newspaper fully supports the stance taken by the FBR on two counts. First and foremost, the real estate price bubble, which has disabled even the middle class from purchasing real estate for decades, would burst if the new tax measures on the sector are implemented. And, second, the majority of the stakeholders in the real estate sector include those engaged in this business with untaxed money at best, and money that may be sourced to illegal activity such as money laundering at worst and needless to add, money laundering is a criminal offence according to the recently-passed law of the land.
At present, all real estate transactions, other than genuine buyers, remain suspended as the stakeholders in the real estate sector have brought all transactions to a halt since the new tax measures were announced in the federal budget for the current fiscal year. The question arises as to how long can these real estate stakeholders hold out given that, by arresting all activity for around five months, they have tied up a significant portion of their funds in real estate. A one-time amnesty would simply enable them to retrieve this money after which they would no doubt seek another available source to whiten their money and, as per the IMF contention, perhaps use remittances or equity stock investments. Thus one would hope that the government supports the FBR stance in parliament and refuses to grant a one-time amnesty.