Analysis of Consensus on Pakistan Property Tax
Real estate stake holders and Finance Ministry have finally reached a consensus on Pakistan property tax infrastructure. As per my opinion the Government has won this round and got what they wanted. A higher evaluation and lots more taxes to be paid to the government. It is now clear that:
- FBR will publish a fair evaluation of various areas in a city. This fair value will be renewed every year as per the existing rates of real estate.
- This Fair value will be only applied for Federal taxes. Namely CGT (Capital Gain Tax). Withholding Tax and for the purpose of section 111.
- CGT validity is reduced to 3 years instead of 5 and will be charged at 10% for the first year, 7.5% for the 2nd year and 5% for the 3rd There will be no CGT after 3 years.
- CGT for property bought before 1st July 2016 will be on a flat rate of 5% for the 3 years period of its purchase.
- Withholding tax will be charged at 2% for a filer and 4% for a non-filer at the fair value declared by FBR.
- Stakeholders have agreed on the new Fair Market Values.
Federal Government Is the Winner
The federal government has not doubled but amost quadrupled its collection of taxes. I was actually happy with the CGT on fair values. Giving 10% of CGT is actually understandable as you are giving that from your actual gain. Withholding tax was the one fixed tax which was worrisome if charged at commercial rates. However giving at least 3% in case of filers and max 6% withholding tax in case of non-filers on fair values. Do remember fair values are expected (Not yet confirmed) to be 200 to 300% of present DC rates.
Let’s try to understand this using an example.
DC rate of DHA Lahore Phase 6 one kanal Plot is 4500000(4.5 Million). Let’s assume that the Fair market value by FBR is evaluated at 9000000(9 Million). The payable taxes to Federal Government are as under. (Please Note that these do not include CVT and Stamp duty of 5% levied by the provincial Government)
Withholding tax in case of filers is 2% by purchaser and 1 % by seller thus total 270000 payable.
Withholding tax in case of non-filers is 4% by purchaser and 2 % by seller thus total 540000 payable.
Include Flat 5% CVT, Stamp at DC rate to your buying and you will pay taxes of 570000 if seller and purchaser are both tax filer and 840000 if non-filer.
As for CGT it should be on the gain and profits. So if the rates are fixed for a year and there is no evaluation system in place than it can easily be evaded by not showing any profits in your tax returns. However in his speech Mr, Ishaq Dar stated that all the taxes will be fixed and if that is applicable to CGT than:
10% CGT if being sold during 1st year in our example above should account for 900000 Rupees. (This is something which still needs clarity and we shall wait for the notification).
Comparative Tax In UK
Now let us suppose that the real estate in Pakistan is to pay taxes as per UK taxation system on the same plot.
2% Stamp duty of 400000 PKR and if sold CGT at 4000000 Lacs (4 Million) profit, max rate of 28% CGT will amount to 1120000 PKR.
What is wrong?
I hope that I am wrong and I have misunderstood what been said and agreed between the Government and the real estate stake holders. But if my calculations are right than everything is wrong about this deal.
- The deal is made for the black money and is actually giving no benefit to the tax payer or the genuine buyer.
- Real estate in Pakistan will be paying more taxes than in developed countries. The reason people in developed countries accept these higher taxes is because the Government uses these taxes on the welfare of the people, on their education, high class health and living standards.
- The prices of real estate will rise exponentially once the market recovers because per transaction cost will increase dramatically.
A few things which should have been discussed with the Finance Minister are :
- Pakistan is in need of houses , while it is ok to tax plots purchased for the pure investment purpose. Houses should not be subject to CGT and possession plots should be kept at flat 2% CGT for 3 years.
- Instead of 3 different kind of taxes only one flat rate should be levied to keep things simple.
- If Fair Market values are being raised the percentage of withholding taxes should not be changed for the tax filers.
- To encourage FDI . CGT rate for Expatriates should be kept at 2% Flat for 3 years.
This would surely help Government to double and triple there revenues and at the same time benefiting common man and encouraging Foreign Direct Investment.
Some of the people in real estate sector are actually praising this solution and to an extent they are right. I believe that in the next few years property prices may double in Pakistan. However from a common man’s perspective, owning a home in Pakistan may just become a dream in a few years from now.
With deepest apologies to the common man from Mr, Ishaq Dar. This is a strong buy signal and in our analysis for next month we will share more details on how the real estate market will react.
Lets wait for the notification and how these taxes will be implemented. I do hope that the FMV established by FBR will not be 200% of the DC rates and there are rumors that they are just upto 35% more than DC rates . Lets wait and see , we will have everything crystal clear in next week and we will come back to you with another analysis with real facts and figures.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1717170 ( Whatsapp)
Skype : Shahnawaz.yaqub