Getting Real about Real Estate Regulation

Author Name: Hassan Tahir      21 Feb 2020     Domestic Economy

On the economic front, Pakistan is wrestling with multiple challenges among which revenue collection is foremost. Much of what is collected is being consumed in foreign debt servicing. There are various sectors that contribute to the government exchequer, but in Pakistan, many sectors, despite their immense potential are performing far below par in terms of fiscal contribution. In many instances, this is attributable to the absence of an adequate regulatory body or mechanism.

Governments usually levy taxes on various sectors for generating revenue, but in a country such as Pakistan, the taxation and fiscal regime oftentimes does not capture or reflect the actual realities on the ground. Because of this, rather than driving increased revenue collection, the taxation regime in fact adversely impacts business activity. According to the estimates of the State Bank (SBP), currently immovable properties contribute a mere 0.4 percent share in the country’s gross domestic product (GDP) which is much lower than the other countries in the region.

The incumbent government of Tehreeq-e-Insaf (PTI) introduced various tax reforms in the last budget of 2019-2020 with the aim of boosting revenues from the real estate sector and documentation of the economy. Individuals associated with the sector categorically rejected the amendments and expressed serious concerns for the future of this particular business sector.

The Competition Commission of Pakistan (CCP) declared the revisions as unfair and demanded key stakeholders’ inputs in formulating the policies. The government took some initiatives such as increasing the FBR evaluation rate of the immovable assets at par-to-market prices. It also allowed non-filers to purchase and gave incentives such a reduction in the withholding tax from 2 percent to 1 percent.

Despite this, the real estate sector was not able to pick up momentum owing to certain ambiguities in the tax structure, as well as other distortionary policies, which are worth mention.

First of all, there are multiple taxes imposed on both the seller and buyer i.e. the deputy collector (DC) rate, the stamp duty and the Capital Value Tax (CVT) with various slabs. Usually people are not able to gather correct information and remain frightened, resulting in a stall in sale-purchase agreements.

On this point, the international financial institutions (IFIs) had called for a removal of the double taxation system – a key barrier to mobilizing revenue collection and improving the tax-to-GDP ratio, which is one of the lowest in the emerging economies.

“The challenge for Pakistan is to generate considerably more revenue by developing a modern tax system without penalizing economic growth or exacerbating income inequality,” the International Monetary Fund said in a report. For this particular problem, devising a single tax regime would be the most viable solution in order to raise business activity in the real estate sector.

Second, the government has no mechanism to obtain the accurate land records, and to a large extent follows the antiquated Patwari culture which risks the promotion of bribery and other corrupt practices.

Recently, the government worked on a Chinese-proposed digital geo-tagging model and approved countrywide digital survey of lands to collect and maintain the land records. This would likely provide much higher transparency and verifiability in the land records process. However, this initiative is lagging in implementation.

The previous Punjab Government had attempted to digitalize the land records but the present provincial government is considering reversing course back to the Patwari culture. Although it was denied by the Punjab spokesperson, a senior person of the Punjab land revenue authority confirmed to the media that the provincial board of revenue has chosen two districts to bring under tehsil and Patwari system as a test.

Most of the time, governments resorted to amnesty schemes before tightening policies to collect taxes. This is not a long-term solution. Consistency in tax policy is the need of the time which should be result-oriented and forward-looking.

The government must engage the key stakeholders while formulating the tax policies and run awareness campaigns to encourage people to pay taxes. The taxation process should be gradual and coupled with incentives for those who comply with the said terms. Through this, the tax net would also expand and business would grow.

The Director of the Islamabad Chamber of Commerce Real Estate Investment Trust (ICC-REIT), while making a presentation about the hidden potential of Real Estate sector to a delegation from the World Bank, revealed that just the commercial portion of the sector is worth an estimated US $1 trillion alone. This makes it a veritable gold mine for wealth creation.

Last year, the sitting cabinet gave the approval of granting the real estate sector with the status of “industry,” and approved the establishment of a Real Estate Regulatory Authority (RERA). These are very encouraging initiatives if implemented in both letter and spirit.

The tendency that many governments have, upon assuming office, to try to bring in sweeping reforms, often raises the level of uncertainty for businesses. An example in our context is that of the Federal Board of Revenue mulling over the introduction of a Value Added Tax (VAT) to replace the previous General Sales Tax (GST). As a general rule, uncertainty in government policies increases the hurdles to private sector investment and planning.

Therefore, a robust approach to regulating economic activity in a manner that balances our revenue collection requirements and our need for a vibrant business climate must: (1) reduce uncertainties and inconsistencies in tax policies, (2) bring clarity and simplicity to processes, and (3) facilitate the ease of doing business. The real estate sector is no exception to that dire need for reform.

 

The writer is a Researcher at Centre for Aerospace and Security Studies (CASS). He can be reached at cass.thinkers@gmail.com.

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