Pakistan: Real Estate Thriving Investments

Real Estate has been the roller coaster in Pakistan’s financial theme park. With its roots setting up in the early 2000s, the Pakistani economy has been highly influenced by the Real Estate sector since then. While investors have preferred the real estate sector to other asset classes in parking their excess funds, it suddenly took a turn proving to be disastrous for the business community. Credit going to a change in regulation during our Finance Minister, Mr. Ishaq Dar’s tenure. This comprised of not only setting up new DC rates according to fair value to almost twice their previously maintained figures for varying areas, it further gave the liberty of setting the fair value of immovable property to the staff of the State Bank of Pakistan.

The new tax policy stated a 10%, 7.5%, and 5% capital gain tax (CGT) for selling the property in the 1st, 2nd and 3rd Year Respectively, while setting it 0% for the consequent years. The Government would also charge a 3% (for filers) and 6%(for non-filers) tax of the entire fair value of the property. During a short time, the real estate went through a boom, meaning the properties previously of Rs. 3 million worth, now had moved up to roughly Rs. 20 Million. This brought the tax charge of a million or more to the seller.  Indeed, a nightmare entering into that tax bracket. Opening up tax consequences for the property holders. Real Estate saw a sudden decline in activity. This gave rise to nationwide protests at different levels. The Association of Builders and Developers of Pakistan (ABAD) and the real estate sector straight up refused to conform to the amendment in the Income Tax Ordinance 2001 (ITO) and Section 68’s addition regarding valuation of immovable property via Finance Act 2016. They said a flat rate of 5% CGT is to be charged on this sector or the government should abolish all taxes on real estate and only charge 0.5% tax on filers and 1% on non-filers on sale/purchase of property in case it kept the fair value mechanism.

The National Assembly’s Standing Committee on Finance and Revenue in November 16’ proposed that the federal government should charge 1% in total for withholding tax, advance tax and capital gain tax (CGT) from both buyers and sellers. It observed that overseas Pakistanis investment in real estate sector has slowed down significantly and local investor taking a flight to other investment roads such as UAE had begun. The Federal Investigation Agency’s (FIA) Economic Crime Wing had asked the Ministry of Finance of UAE for the exchange of information on Pakistanis having investments there. FIA officials claimed that 31 Pakistanis have pumped approximately Rs. 60 Billion into Dubai. Escaping regulation from one country, the investors faced yet another problem with this collusion of the two governments. Unconfirmed reports claim the investors have been found to be mostly filers and of them mostly has filed their tax returns of the past 5 years.

Rana Muhammad Afzal, federal minister of finance and revenue, said at a meeting with officials of Association of Builders and Developers (ABAD) that the real estate industry is injected an estimated amount of $8-10 billion by remittance from overseas Pakistanis. No wonder the government has its eyes set on those taxable figures. Many property dealers even claimed that had there been amnesty schemes, the outflow to UAE could have been prevented. Lately the government has declined the dealer community’s request to not disclose the source of income, another consequence of the tax payments, if they opt for the amnesty scheme paying 3% of the fair value of hidden assets. So, with the inflexibility of the government for local businessman and increasing scrutiny for foreign investments, is UAE a safe haven, is a question for the business community of Pakistan.

Leave a Reply

Your email address will not be published. Required fields are marked *