REVENUE
Historically, investment in the real estate sector has been considered one of the best ways to evade income tax and launder black money in Pakistan. However, in recent years, the federal and provincial governments have made various amendments to tax and land revenue laws for effective taxation of immovable property. Resultantly, the real estate sector is gradually becoming less lucrative for tax dodgers and corrupt individuals.
Pakistan’s cash-based economy encourages people to carry out transactions in cash instead of through banking channels. Therefore, these transactions take place under the radar of the Inland Revenue Department and anti-corruption agencies such as the National Accountability Bureau (NAB) and Federal Investigation Agency (FIA). Untaxed and black money enters into the economic system via real estate transactions made in cash or through Benami accounts, as Deputy-Commissioner rates or revenue tables of land set by the district or provincial governments help buyers of real estate to get their property registered at a nominal price; far less than the actual value of the property. After that, these properties are sold at market price and tax evaders earn capital gain, which used to be tax-exempt until the year 2012. Then, in the Finance Act 2012-13, an important amendment was made to section 37 of the Income Tax Ordinance, 2001 to tax capital gain earned on the sale of immovable property. If a person sold his property within one year or one to two years of purchase, a levy of 10 percent or 5 percent respectively was applied to the gain. However, capital gain on the sale of property after two years of ownership remained exempt from income tax until the end of the financial year 2015-16.
Besides black money earners, a large number of land developers also exploit this exemption.
Many of the companies involved in land development, purchase undeveloped land at a nominal price and register it in the names of their directors and employees. After that, the same company buys back the land from its directors or employees, whatever the case may be, at an exorbitant price. Carrying out such transactions not only provides white money to directors and employees of the land development firms for their future ventures, but at the same time, it also reduces gross profit margins of land developers. Resultantly, developers avoid paying tax on their huge incomes by declaring nominal taxable income.
The 18th amendment to the constitution empowered the federal government to tax capital gain on immovable property. Entry 50 of the Federal legislative list (Part I of the fourth schedule) stated before said amendment (the federal government can levy) “taxes on the capital value of the assets, not including taxes on capital gain on the immovable property.” However, the term “capital gain” was omitted from the federal legislative list through the 18th amendment to enable the federal government to tax gain on the sale of immovable property.
In the 2016-17 Budget, the federal government extended the taxable period for capital gain on the disposal of immovable property from two years to five years. Now, the seller of the immovable property is required to pay a flat 10 percent tax on the gain if he sells his property within five years of purchase. However, the amendment made to section 68 of the Income Tax Ordinance, 2001 which deals with “fair market value” gained much attention both in print and in electronic media. A sub-section 4 was inserted into section 68 through the finance act 2016-17, which reads as follows:
“68(4)...Notwithstanding anything contained in sub-sections (1) and (3), the fair market value of immovable property shall be determined on the basis of valuation made by a panel of approved valuers of the State Bank of Pakistan.”
It is pertinent that before this change to section 68 of the Income Tax Ordinance, 2001, the Inland Revenue Commissioner was empowered to determine the fair market value of any property. Now, valuers of the State Bank of Pakistan are entrusted upon by the government for the valuation of property. Before the amendment, section 68(1) read as follows:
“68(1)...For the purpose of this Ordinance, the fair market value of any property or rent, asset, service, benefit or perquisite at a particular tie shall be the price which the property or rent, asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the open market at that time.”
However, in the latest budget, after the first occurrence of the word “price” in section 68(1), the words “other than the price of immovable property” were inserted. The amendment will enable the Inland Revenue Commissioner to determine the fair market value of the property with the help of independent valuers approved by the State Bank of Pakistan. The appellate fora will accept the valuation of property as assessed by the independent third party instead of the Commissioner himself.
This commitment to taxing immovable property shows the resolve of the federal government and Federal Board of Revenue. It will not only hinder the investment of black money in real estate, but it will also help reduce land prices, which will in turn boost further investment in the housing sector by the upper middle and middle classes. Moreover, it will make money laundering through real estate investments harder than in the past.
The writer belongs to Inland Revenue Service
