Real estate tax shelter

The current government has taken a clear stance against land grabbing and encroachments but they also simultaneously need to focus on tax reforms for the real estate market to wrestle with the FBR zeros on the real estate transactions. The revenue contribution from property tax should be 1% of the GDP in developing countries. But in reality, real estate tax in developing countries is 0.1% of the GDP and rarely 0.5%. While in the United States, Canada and Australia property tax collected is close to 2% of the GDP on average.

The real estate sector is the second-largest sector of job provider and also stimulates the growth of industries like cement, steel and other building material. But, negligible taxes on home, land and other forms of real estate in Pakistan is one of the key issues that impedes achieving tax revenue targets. Pakistan spends $5.2 billion on constructions in a year and many more billions are spent on buying residential and commercial plots but the contribution of real estate sector where most of the untaxed money is parked stood at only Rs23 million or less than 0.1% of the size of national economy in the previous fiscal year.

The property tax collection by provinces sharply fell 20% to 4.81 billion during the first 10 month of the outgoing fiscal year of 2017/18. Moreover, the property tax collection declined from 32.62% to 2.66% in July-April, while the collection stood at 3.88 billion in corresponding period of the last fiscal year.

One of the key reasons for low tax collection from the real estate sector is that all big housing societies do business without recording their transactions. The FBR has also noted that these big real state tycoons stood at mere Rs232.7 million in the last fiscal year. Similarly, the other important reason for the low collection of real estate taxes in Pakistan is the very low tax base and exemptions given to the sector on taxes due to close relations between these big giants and politicians in government.

However, the government can increase the tax revenue obtained from the real estate sector in order to meet its revenue target by taking the following measures:

Firstly, the period of gains tax on purchase of property should be seven years rather than five. And the tax rate should be decreased from 2% to 1% for non-filers and from 4% to 3% for filers. Due to this step, the burden of taxpayers will be reduced but the time for paying the taxes would be increased, so people will be able to pay taxes easily. Secondly, the tax slab should be decreased from six million to four million as this will increase the tax base which will lead to an increase in the tax revenue. The government should adopt progressive taxes according to the worth of property and also adopt severe punishment strategy for non-tax payers.

Thirdly, the government should create general awareness about real estate taxes and highlight the benefits of taxes that they receive such as an increase in the value of property by spending on infrastructure.

Last but not the least, the most important component in the case of Pakistan is that there is the issue of tax evasion by real estate tycoons, who are sheltered by political mafias. In this regard, the government should take actions to control corruption, political interference and impose taxes on real estate tycoons according to the value of their real estate business.

Published in The Express Tribune, January 30^th, 2019.

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