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Posts tagged as BR Research

Naya Real Estate (i)

It is no secret that real estate is a haven for funneling black money in efforts to whiten it and avoid taxation. Due to the speculative nature of property prices, it has also become one of the most lucrative investment instruments in the country. According to zameen.com, prices per sq/ft. for plots, houses and residential properties have nearly tripled since 2011, and the trend is mostly upward.The SBP’s latest quarterly report tackles this subject well. It points out: “a sizable amount of activity took place in sale and purchase of plots without a corresponding activity in the real estate development”.

Moreover, due to the huge capital gains, little regulatory oversight, and low incidence of taxation, investments have been diverted away from productive sectors that could use the money. Companies end up putting their earnings into the property market for quick returns instead of in expansions or technology/innovation.Furthermore, taxing the real estate sector has been unnecessarily made complicated because of the three different valuations for properties  the District Collector’s DC value (for the purpose of capital value tax, property tax and stamp duty collection), the FBR value (introduced in 2016 for capital gain tax and withholding tax) and the market value.

The market value is substantially higher than FBR and DC rates leading to huge losses to the national exchequer. And though, since 2016, the government has attempted to bring the provincial and federal rates in line with the fair market value, it hasn’t been all that successful. There is a gaping hole where government revenue from real estate should be.In fact, the three valuations and the wide variations between them have further inflated the black economy and contributed to a lot of confusion, especially for genuine investors and developers. As told to BR Research in an interview (Jan 1, 2018) by the former Chairman of ABAD, Yousuf Jeewa, it was impossible for investors to function with different valuations for one investment. When they go into audit, they simply cannot explain the ambiguity. He recommended that there should be only one valuation on which one tax should be collected. It was also suggested in the FY19 budget last year to eliminate DC and FBR rates and introduce a declared property value for tax collection. It remains unimplemented.
https://fp./2018/01/20180101331946/

Meanwhile, the unrelenting increase in prices also ensures that projects that go into development are almost never within the reach of the lower-middle to low-income groups. When, in fact, nearly 80 percent of the 10-12 million shortages of houses are in that segment, and nearly half of the current urban population lives in slums and informal settlements. Private-sector housing schemes and projects are focused elsewhere.This raises the critical question of making housing affordable overall, and providing low-cost housing opportunities for the rising urban population and migrants that increasingly move to the city only to settle down in slums. Not only will it mean curbing speculation in the property market, it also means providing flexible means for mortgages.

Some recent measures could yield results. Last year, the government banned non-filers from the purchase of property of above Rs4 million. The SBP came up with a low-cost housing finance policy, which could substantially boost mortgage financing (read “Rousing low-cost housing finance”If DC rates are removed, the one-stage tax, together with restriction on non-filers, will simplify tax process, boost documentation and shore-up government revenues. But the use of land as a speculative commodity along with the myriad of regulatory and legal land issues will remain unresolved.

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