The proposed Finance Bill 2024 sets progressive advance tax rates for property sales: filers pay 3.0 per cent on property up to Rs50 million; 4.0 per cent for property around Rs50-100 million; and 5.0 per cent for property over Rs100 million. Non-filers pay a flat rate of 10 per cent. Late filers have to pay 6.0, 7.0, and 8.0 per cent respectively for the same brackets.
The bill also introduces new rates for property purchases. Filers will pay 3.0 per cent on the purchase of property up to Rs50 million; 3.5 per cent for Rs50-100 million; and 4.0 per cent for over Rs100 million. Late filers face 6.0, 7.0, and 8.0, per cent respectively, while non-filers pay 12 per cent, 16 per cent, and 20 per cent for the same brackets.
Gains from property disposal and securities acquired after July 1, 2024 are taxed at a flat rate of 15 per cent for filers, with non-filers paying a minimum of 15 per cent and progressive tax rates based on the prescribed slab rates in Division I of Part I of the First Schedule. In the Pakistani tax system, this schedule refers to the income tax rates applicable to individuals, including various income brackets and their corresponding tax rates.
Pakistan’s real-estate sector’s value is hard to assess and tax due to significant off-the-books capitalization. It is estimated to be three to four times the capitalization of the Pakistan Stock Exchange, which ranges from $30-40 billion. This new regime, targeting property transactions and capital gains, is projected to swell government public revenue by over Rs60 billion. This move, though contentious, marks a pivotal shift in the country’s tax policy landscape.
The increase in capital gains tax (CGT) challenges Pakistan’s economic framework. Although designed to enhance government revenue, the hike might reduce transaction volumes as properties are increasingly transferred via power of attorney to evade taxes. This could lead to a drop in overall tax collections and promote tax evasion or underreporting, thus complicating enforcement efforts and expanding the informal market.
Raising CGT on property could counterproductively affect Pakistan’s real-estate market. Higher CGT could discourage sellers, leading to fewer property transactions and reduced market activity. This might stabilize or lower property prices as investor interest, especially from abroad, wanes -- potentially affecting crucial foreign investment inflows into the sector. Notably, half of Pakistan’s remittance inflows, which significantly fuel the sector, could be impacted.
The CGT hike could potentially hinder Pakistan’s economic growth. The construction sector, contributing 2.53 per cent to GDP and employing 9.5 per cent of the workforce, might face a slowdown, leading to higher unemployment rates. The real-estate sector, contributing 3.0 per cent to GDP, also faces risks. In comparison, the real-estate sector remains less quantified in employment but is equally vital. Such tax adjustments could trigger unintended ripple effects, stifling growth in these essential industries and affecting the broader economy.
Proponents strongly support raising the CGT for its direct taxation benefits and progressive qualities. This method aims to tackle income inequality by levying higher taxes on profitable asset investments, fostering fairer wealth distribution throughout society. While concerns persist that this may discourage investment, the broader effects of an increased CGT could significantly boost social fairness and aid in economic stabilization, ensuring that affluent individuals pay a proportional share towards societal progress.
The advocates of increasing CGT state that it can discourage speculative real-estate investments that inflate property prices and contribute to bubbles, leading to a more sustainable and stable market. By taxing short-term capital gains more heavily, CGT encourages investors to hold their investments longer, fostering a stable investment environment and supporting the long-term health of the housing market. This approach reduces market volatility, ensuring property prices align with actual economic conditions, thereby promoting overall economic stability.
Globally, attitudes towards CGT differ and are shaped by distinct economic systems. In pro-market economies like New Zealand and Hong Kong, minimal government intervention boosts private enterprise and market growth, fostering low to no CGT to invigorate investment and energize the real-estate market.
In contrast, welfare states like France and Denmark implement higher CGT rates to support extensive social services and wealth redistribution, aiming to secure economic stability and deter speculative investments. Thus, whether aiming to spur growth or enhance equity, the level of CGT is a strategic tool that shapes a nation’s economic and social landscape.
The increase in capital gains tax could be a double-edged sword for Pakistan’s economy. On the one hand, it promises market stability and a fairer tax landscape; on the other, it risks stifling the vibrancy of the real-estate sector -- a critical engine of growth. The government’s challenge will be to fine-tune these policies, ensuring they do not deter investment but instead foster an environment where equity and compliance drive sustainable economic progress. Promoting growth without sacrificing fairness or economic vitality is a delicate balancing act.
The writer is a Lahore-based economist working as a research associate at the Centre of Economic Planning and Development (CEPD), Minhaj University Lahore, Pakistan
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