FBR Increases Property Valuation Rates

The Federal Board of Revenue has planned to increase property valuation rates up to 80% in 56 cities across Pakistan from next month. This would increase tax revenues from real estate transactions and curb speculative investments in a sector that has long been under-taxed.

Furthermore, FBR is now extending property valuation for tax purposes to 12 more cities. In this regard, the valuations are being revised, considering property type, location, and other variables. These rates are adjusted periodically to reduce the gap between government-assessed and actual market prices. This is important to calculate taxes such as capital gains tax, federal excise duty, and withholding tax. Still, the FBR has failed repeatedly to align its valuations with the real market dynamics.

Ordinarily, there is a pretty wide gap between what the real estate market and government-fixed rates would pay due to the much larger size, informal, and undocumented nature of the economy. In such an economy, most the buyers as well as the sellers attempt not to pay taxes and do not account for the source and quantity of money they make. As such, the region of real estate has also taken the dimension of an investment for the more affluent with the intention of hiding money or evading paying the taxes. Low tax rates are also inviting people or corporate units for property investment also.

The FBR and its institutions continue to keep realistic and market-based urban property rates which can take real estate properties under their effective taxing mechanisms. However, the attempts face the constraints of influence peddling that involves high-status groups comprised of political workers, local businessmen, serving military officers and bureaucrats and Overseas Pakistanis.

According to a World Bank study, tax revenue real estate could fetch in a similar economy is said to be between Rs 600 billion and Rs 700 billion. On the other hand, Pakistani tax authorities now estimate that the actual collection, through taxes on such dealings, barely touches Rs 200 billion. That is the reason for such scarcity.

The biggest problem is the shadow economy, which is sustained by tax exemptions for military men and bureaucrats. The government’s policies have fostered the growth of a parallel, tax-free system of finance called ‘plot files.’ Plot files are a very liquid asset class that are usually sold without taxes.

Another is benami property transactions-which are unregulated-and keep on permitting plot files being traded several times in extended time periods without any tax obligations arising for the parties involved. So, tax revenues may thus remain only limited even as the valuations become all the more accurate unless system loopholes are addressed, and better regulatory measures were put in place.