Heavy taxes on real estate to generate revenues

heavy taxes on Real estate
Heavy taxes on real estate to generate revenues

By Muhammad Abdullah

The government has come up with a strict decision to impose heavy taxes on the real estate to discourage the prevalent trend of investment on immovable property.

The proposal to introduce high tax rate not only generate revenues for the national kitty from the pockets of rich and wealthy people but this will also control the hyper inflation on the immovable properties that also deprive the needy families to buy a small home even in the suburbs of the metropolis.  

At present capital gain on immovable properties is separately taxed on the basis of holding period of property. It is proposed that income from capital gains may also be taxed under normal tax regime at normal tax rates. It is therefore proposed that;

1.       Income from capital gains on open plots is proposed to be taxed at 100% where the open plot is sold within one year and for period up to ten years.   Income from capital gains on constructed property is also proposed to be taxed on similar lines when sold within period of five years.  

2.       In case a property is sold within one year it shall be taxed as normal income.

3.       Tax shall be charged on 3/4rth of the income if the same property is sold after one year.

At present if a purchaser of an immovable property pay 3% tax on the difference between the DC value and FBR value of property than he is not required to explain the source of investment on the said differential amount. This is a permanent tool for whitening of undeclared money which is against the international tax norms. Therefore it is proposed to withdraw the tax at the rate of 3% on differential amount.

Withholding Tax on Immovable Property  

FBR had introduced valuation tables of immovable properties in major cities earlier. The rates notified by the revenue authority are still considerably lower than actual market value.

It is therefore intended that FBR rates of immovable properties would be taken closer to or about 85% of actual market value. As the increase in FBR values of immovable property is going to increase the incidence of tax on genuine buyers and sellers, it is proposed that rate of withholding tax on purchase of immovable property may be reduced from 2% to 1%.

 At present, withholding tax on purchase of property is attracted only if the value of property is more than four million rupees. There is a tendency to avoid this tax by breaking the transaction into amounts less than rupees four million whereas the actual value of property is more than four million. In order to stop the misuse of this threshold, the withholding tax on purchase is proposed to be collected irrespective of the value of property.

At present, there is no withholding tax on sale of property if the property is held for a period of more than three years. This is in line with the holding period for taxability of capital gain which is also three years. As capital gain is to be taxed under normal tax regime even beyond the period of three years,

It is proposed that withholding tax on sale of property be collected irrespective of the holding period to bring it in line with the proposed treatment of capital gains.

Purchase of Property through Banking Instrument

 In order to capture the actual value of sale purchase transaction, it is proposed that persons purchasing immovable property of fair market value greater than rupees 5 million in the case of immovable property and one million or more in the case of movable property may be required to purchase through a banking instrument (pay-order or bank draft) other than a bearer cheque and a penalty at the rate of five percent of FBR value of immovable property is proposed for violation of this requirement.

Further in case of violation of this condition no depreciation allowance shall be available and purchase price for capital gain purpose shall also be treated as zero.

Real Estate Offers Windfall Profits To Investors

Consider this as an example that if someone had invested Rs 1 million in a plot in Karachi at the end of 2013, it would have attained a market valuation of around Rs 2.3 million in 2018 – a considerable capital gain of 129 percent in just 5 years.

Such huge capital gains, along with a steady increase in rentals and a subdued tax liability, made the real estate sector the most sought-after avenue for high net worth individuals/firms.

According to our previous report, some of the large industrial groups have preferred to invest their retained earnings in the real estate – both residential as well commercial (shopping malls and restaurants), instead of expanding their industrial base.

What’s Next?

The proposal of introducing taxes on real estate is old from FBR however it was finally presented in the latest financial bill however it will largely oppose not only parliamentarians of the opposition parties but from the government as well.

Not only parliamentarians but businessmen and industrialists who made huge investment will make hue and cry on the imposition of taxes and ultimately the government will likely to revise down tax rates.

There is a big question to monitor the sale and purchase of the immovable property especially open plots and its reporting of prices to the revenue authority. Also, massive corruption in different government prices may affect the reporting and monitoring system of property purchase in different parts of the country.

The government should give relief to genuine buyers by reducing withholding tax on the sale and purchase of the immovable properties.

A threshold amount of the property amount a value of Rs. 4 million should be exempted taxes. The government should introduce mechanisms to misuse this exemption whereas the taxes should be exempted on the holding period of the property for the period of 10 years.