Taxing property

Property tax reform is one of the most important issues that need to be tackled by taxation authorities. Property tax has two aspects. The first is rental income on properties; the other, transfer of ownership. Sealing properties whose owners are not paying taxes is a regular practice, but property tax reform has usually been implemented at a rather slow pace and manner. Estimates suggest that Punjab alone could collect around Rs75 billion in property tax, instead of the around Rs1 billion it currently collects. The situation is similar in other provinces. Now, the government has passed an amendment to the Income Tax Ordinance 2001, which will mandate that all investors will have to pay property tax on the basis of an evaluation undertaken by the State Bank of Pakistan. SBP evaluators will replace the current provincial system of determining the market rate of properties. The change is supposed to be implemented on July 1 – although, there is no evidence to suggest that the said SBP evaluators have either been hired or trained to undertake the tax. Without the requisite training, having the SBP as evaluator is not very likely to solve the complex issue of underreporting property values. Moreover, the choice of SBP valuators instead of the independent board, which was proposed to the Senate Standing Committee on Finance, is a bit of a step down.

Clearly, the government feels pressured to announce ad-hoc measures, instead of wholesale tax reform, with international financial institutions breathing down its neck. Half-baked measures make for a similar response from the public, which sees right through them. As it stands, most property sales are usually registered at less than 10 percent of the actual amount paid on the basis of the DC rate. The federal government has made property tax collection a priority, but its measures are more focused on increasing taxes on existing valuations. Budget 2016-17 announced doubling of the withholding tax on the sale/purchase of properties and announced a capital gains tax of 10 percent on properties sold within five years. Changing both the evaluation mechanism and doubling withholding taxes in the same year make for a confused strategy. These ad-hoc tax changes would only increase the incentive to declare lower property values. We have a long way to go before property tax is streamlined. All that said and done, though, it is certainly heartening to see the government focus on the problem of taxing the huge informal property market. What is needs is a coherent strategy with a commitment to enforcement. The DC rate itself was a mechanism to determine the market rate, but it has failed to do so due to the under-invoicing of property transaction. Will involving the SBP solve the problem of under-invoicing or will its evaluators use a different mechanism to determine market rate? This is the key question that must be addressed by the government in its reform of property tax laws.