Reforming property taxes

LAHORE: Karachi and Lahore have immense potential to fund much of their operational and developmental needs if property taxes are collected at international standards.

In developed economies, property taxes are a major source of revenue for local governments, used to fund city operations and development, including public services, infrastructure, schools and safety.

A World Bank study noted that property tax collection in Pakistan could increase by up to six times if tax assessments were closer to actual market values and the collection system improved. The potential for cities like Karachi and Lahore is significant, given their large taxable property bases. In 2021, Karachi was estimated to have a revenue potential of Rs200-300 billion annually from property taxes, compared to the current collection, which is only a fraction of this. Lahore could similarly collect Rs100-150 billion or more annually, which would adequately fund the management of these cities.

In developed economies, property taxes are generally based on the market value of the property, which is periodically assessed. Rates differ between regions, with a percentage applied to the assessed value. These rates can vary depending on local laws, property type (residential, commercial, industrial) and local government needs.

In most developed countries, property taxes are a significant contributor to local budgets. In many cases, they are sufficient to fund local services, but cities often supplement this revenue with other taxes (sales tax, income tax) and federal/state aid to meet growing operational or developmental needs.

Property tax in Pakistan is calculated based on a valuation table for various categories of properties. The tax rate depends on the area, the type of property and its usage (residential or commercial). These values can sometimes be outdated or undervalued, leading to lower tax revenues. Tax is collected at the provincial or local level; however, property taxes have historically been low in Pakistan due to challenges such as under-assessment, tax evasion and political interference.

If Pakistan were to enforce property tax collection at rates closer to international standards -- based on accurate property valuations, updated regularly and with fewer exemptions -- it could significantly enhance local government revenues.

In many developed countries, widows, retired government employees, senior citizens and disabled individuals are often granted partial or full exemptions from property tax. Many US states offer exemptions to veterans, senior citizens and low-income individuals. In the UK, council tax exemptions exist for single occupants, students and the elderly in some cases. Various Canadian provinces offer property tax deferrals or reductions for senior citizens and those with disabilities.

In Pakistan, widows, retired government servants, and properties under a certain value threshold are often exempt from paying property tax, although the extent of exemptions varies by province. In cases where exemptions are more widespread or poorly regulated, they have reduced the fairness and revenue-generating potential of property tax systems.

In developed economies, tax compliance is generally stricter, and the property valuation process is more transparent and frequently updated, ensuring taxes align with current market values. This allows local governments to rely on property taxes to fund essential services.

Overall, property tax reforms in Pakistan -- including a fairer valuation system and efficient collection practices -- could significantly contribute to local development and urban infrastructure, as seen in many developed economies.

Currently, properties are often assessed at values far below market rates. In many parts of Pakistan, including Karachi and Lahore, houses built on five marla (approximately 120 square yards) or smaller are often exempt from property taxes or taxed at very low rates. This exemption is intended to protect low-income homeowners but also limits tax revenue, as many mid-tier and even upper-middle-class homes fall into this size bracket. Exemptions should be reviewed and targeted only at the most vulnerable segments of society.