For two weeks beginning July 1, activity in the real estate sector slumped as the new rules for property valuation took effect and fresh investment in the real estate came to a virtual halt.
Real estate prices have also began falling in Karachi in response to the budgetary announcement that the fair market price of immovable property would be determined by valuers appointed by the State Bank of Pakistan.
On July 4, the SBP announced the names of the property valuers. Those who thought the implementation of this move might be delayed lost all hopes and became panicky, a fact acknowledged by Finance Minister Ishaq Dar.
KCCI has demanded that the previous system for property valuation, through a pre-defined category-wise table, must continue but be revised more frequently
But by mid-July the government succumbed to the growing pressure of the real estate tycoons and the speculators in the property business who were hurt by the move. The minister then held a brainstorming session with senior officials of the Federal Bureau of Revenue to find ways for mitigating the growing opposition of the new property valuation rules.
Chances are that some adjustments may have to be made to appease the special interests, according to the sources privy to Dar’s meeting with FBR officials. They say that the FBR has already started examining some proposals forwarded by these influential lobbies directly and through a chartered accountancy firm that seeks to tone down the new rules of the property valuation.
The move to involve professional, SBP-approved valuers in ascertaining fair market prices of immovable property is aimed at ending under-declaration, discouraging channelling of ill-gotten money into real estate and boosting government revenue. According to real estate experts, trillions of rupees worth of black money has been whitened over the past three decades by corrupt officials and money launders, taking advantage of a faulty system of property valuation.
Previously, the job of property valuation was carried out by the revenue officials under an archaic system which did not reflect the market price. For example various properties in DHA, Karachi, were valued at Rs1,650 per square yard, against the prevailing market price of up to Rs155,000.
Occasional moves to check this menace and control the spread of the parallel economy could not succeed.
Real estate transactions are made in cash or through Benami accounts. The properties are registered at rates fixed by the Deputy-Commissioner or the revenue tables of land prices set by the district or provincial governments.
Such properties were sold at market prices which helped tax evaders earn capital gains that were tax-exempt till FY12. In FY13, however, this exemption was withdrawn and 10 and 5pc levy was imposed respectively on the capital gain earned by those who sold their properties within 1-2 years of the purchase. The capital gain on the sale of property after two years of ownership, however, remained exempted from income tax till FY16.
In the FY17 budget, the taxable period for capital gains on disposal of immovable property has been extended up to five years. And, a flat 10pc tax has now been made applicable on the seller of the immovable property if he sells it within five years of purchase.
But through an amendment to section 68 of the Income Tax Ordinance, 2001, the task of determining fair market price of property has been given to the professional valuers approved by the SBP.
The SBP has, accordingly, announced a 106-member approved panel of the property valuers. Nineteen of them have been permitted to determine the fair market of a property of unlimited amount, 59 for a property worth up to Rs1.5bn and 28 others for a property worth no more than Rs500m.
The central bank has made it clear to all the approved valuers that the panel will remain effective till the time the Securities and Exchange Commission of Pakistan sets up its own regulatory regime for valuers and necessary amendment is made to the relevant law.
“Now, the reason why property prices have begun falling is that the prospective buyers know that the market value to be determined by professional buyers will be far more than what it would have been had the value been determined under the current revenue value tables,” says a former chairman of the Association of Builders and Developers.
Buying a high priced property and paying 10pc capital gain tax on it if it is sold before five years means a lot more additional payment in real terms. This has lessened the incentive for investment hoppers, tax-evaders and money launders to a great extent. That is why property prices are coming down not only in posh areas like Defence Housing Schemes and Clifton but also in middle-income group neighborhoods like Gulshan-e-Iqbal, Gulistan-Jauhar and North Nazimabad etc, realtors say. President DHA and Clifton Association of Real Estate Agents Raja Mazhar claims that property prices in posh areas have declined by 10-20pc.
Interestingly, whereas the government claims that the move of determining fair market price of the real estate will discourage investment of ill-gotten money in this sector and help in reducing land prices, businessmen think otherwise.
Business leaders fear that since the fair market prices of properties determined by SBP-approved valuers would need a final nod from Inland Revenue commissioners, it would promote corruption. KCCI President Younus Muhammad Bashir has demanded that the new rule must be revoked forthwith.
The KCCI also demanded that the previous system for property valuation, through a pre-defined category-wise table, must continue but this property valuation table be revised more frequently and more categories be added to it.