The business of property transfers has nosedived since the announcement of the new evaluation system and imposition of fresh taxes on real estate sector in the budget for 2016-17.
Property dealers told The Nation on Sunday that the new system introduced by the federal government had totally halted registration of properties all over Pakistan, causing frustration among applicants and huge losses of revenue to the government.
Senior Vice Chairman of Association of Builders and Developers of Pakistan (ABAD) Arif Yousuf Jeewa said that the registration of properties had completely stopped throughout the country due to rigid attitude of the registrars, who now asked the applicants to produce stamp duty according to property valuation notified by the Federal Board of Revenue (FBR) instead of DC rates.
“All registrars, throughout the country, are rejecting those property cases presented on the basis of DC valuation, saying that they will only accept those applications having stamp duty according to immovable property valuation fixed by the FBR.
But the fact is the DC rates are for stamp duty and it is the domain of provincial governments while property valuation mechanism of the FBR is for collecting Withholding Tax (WHT) and Capital Gain Tax (CGT) only and it has nothing to do with the stamp duty,” he added.
Real estate agents of Lahore and Karachi said that transfers of plots had almost stopped since the new fiscal year had started.
Haji Muhammad Afzal, a Lahore-based stamp vender, who deals in real estate business in DHA and Bahria Town, said that not a single property deal had been done for the last two months, with the exception of deals regarding rent of houses.
“Literally, we can say that Pakistan’s real estate market is crashed, as there is neither a buyer nor an investor,” he added.
Afzal said that only few houses were registered by some other agents on huge commissions paid to the officials in Excise Dept.
“On average, 100 transfer deals are completed in DHA on a daily basis, which is now almost zero,” he informed.
“The investors are uncertain and also unaware about how much duties and taxes they will have to pay when they purchase a property as per the evaluation done at market rates rather than the DC rate,” Afzal elaborated.
Fawad Rehan, a real estate agent, said that a sudden surge had been witnessed in the transfer of plots before the budget for 2016-17, as the long-term investors quickly made up their minds to buy properties before the implementation of the new regulations.
“However, after the budget, the property transfer business totally collapsed,” he said, and added, “We are expecting reversal of the regulations and reverting to the DC rate evaluation, as a lot of stakeholders have moved the court over the new evaluation system, which is not fact-based,” he added.
He said the FBR had notified valuation of immovable properties more than the fair market value in many cities.
He demanded the FBR to remove anomalies in this regard and bring the valuation at par with fair market value for which the government has formed the new law.
He said that the government and the FBR should issue clear instructions to all registrars that the immovable property valuation fixed by the FBR was just for the sake of collecting WHT and CGT, and had nothing to do with the stamp duty.
A property dealer of China Scheme, Mushtaq Sulehri, said the real-estate business had slowed down since the announcement of budget in June last.
He said that transfers of plots had almost stopped since the new fiscal year had started.
He said that only a few deals had been done on submission of affidavits during the last two months.
Former president of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Zakria Usman termed the FBR’s property evaluation tables as unrealistic, demanding the government to withdraw it immediately.
He said the new mechanism for immovable property had destabilised the real estate market.
“We reject the notification of the FBR, issued on August 2, as it has jacked up the prices of industrial plots by 400 to 600 percent, which has resulted in the flight of capital,” he added.
Source: The Nation
We personally believe that the real estate market of Pakistan is not ready to understand the recent and stark changes made in the Finance Act 2016 let alone accept them. Implementation of these new amendments has left investors in a state of mayhem and its effects are felt wide and across in the form of a loud silence seen in terms of very low sale and purchase activity in investor-centric areas of Karachi.
The government needs to realize that the implementation of fair market valuation criteria and a sudden and sharp rise in Capital Gain Tax is not something the market can accept and deal with right away. The procedure has to be gradual and be implemented in phases spanning at least 3 years.
We are not surprised to see that genuine buyers don’t have many concerns over these taxes as many of them are either first time buyers or those with long term investment plans. It also seems alright to assume that they perhaps find the details a little too confusing to comprehend and are thus waiting for the matter to settle.
Investors, on the other hand, have serious concerns and they aren’t willing to make a move unless the matter settles in a manner less troublesome for them. The agents operating in investor-focused areas have major reservations about the new reforms as they have already started to deal with a standstill in property sale and purchase activity.
The change in current property valuation mechanism will open doors of bribery or corrupt elements in the department concerned. If there is a plan in place to deal with this, I still believe that the new property valuation mechanism should be implemented over the years as the current difference in Deputy Commissioner (DC) Rate and the rate which the property is actually sold is huge. This difference can’t be removed overnight. Moreover, Capital Gain Tax (CGT) of 10% is also a little too high.
The government should instead increase the values listed in the DC rate chart by 25% and do this every year to fill the gap. CGT should also be brought down to 5%.
Such strong reforms will obviously discourage real estate investors and keep them from investing in property. These investors might find other options to park their money and get profit on it letting the estate agents worry about their bread and butter. Real estate market will certainly not remain attractive for investors and this will leave direct and strong impact on the construction and development sector. So the drastic effects will not just be seen on the earning of real estate agents, labourers and related industries will also suffer.
In case the taxes are implemented, buyers and investors will be more inclined to invest in projects where possession handover is still pending. In case of Karachi, Bahria Town and all other projects awaiting possession can benefit greatly from the present tax chaos. Many investors and agents have already taken note of it and it is very likely that investors’ focus will soon be shifted from DHA to Bahria Town Karachi.