Panama Papers might have surfaced recently, but real estate has long been a safe haven for tax evasion and ill-gotten, black money in Pakistan. And this has been due to lack of documentation, regulation, and taxation in the sector as most transactions are carried out of the banking channel.
How have they been whitening the black money? The culprit is largely the capital gain on properties that the real estate investors have their eyes on. And it is this capital gain that remained outside the taxation realm for a long time. The significance of capital gain can be deciphered from the process of registering and disposing the properties; where the registration of the properties is carried out at rates estimated by the Deputy Commissioner’s office, the properties are sold at market rates that are much higher, as the government has been unable to keep the land records updated, resulting in extravagant (un-taxed) capital gain where the evaders and speculators have found refuge.
While still a long way to go, two efforts by the government largely in shape of amendments to tax and rules in recent years have started to build some hurdles for the crooks and the Dodgers. The capital gain on property remained outside the taxation ambit up until 2012, after which an amendment was made in the Income Tax Ordinance, 2001 in the Finance Act 2012-13. According to the amendment, capital gain tax (CGT) of 10 percent, and five percent was applicable on property sold within one and two years, respectively.
With the passage of the latest Finance Bill, there has been further amendment to the time frame and rate as there was no tax on capital gains earned on the disposal of property beyond a holding period of 2 years; In 2016-17 Federal Budget, the taxable period for capital gain on the sale of immovable property has now been extended from two years to five years – possible way to discourage the evaders investors of black money.
The government further tightened the noose by altering the way the property prices are evaluated – a caveat leading to a surge in abnormal capital gain. According to another amendment to the Income Tax Ordinance 2001, all properties are now to be evaluated for a fair market value through the values of the State Bank of Pakistan – a third party and not the DC office. The decision has been taken to primarily encourage documentation.
It might be too soon to start counting the positive effects of just a few efforts to tax and regulate the real estate market. However, there is a hoping that such steps in future would bring down the ridiculously high property prices and investment of black money into the economy.
Published: July 13, 2016.
