The Real Es­tate Co­nun­drum

It is hoped an im­por­tant amend­ment in Pak­istan’s In­come Tax Or­di­nance will dis­cour­age black money and will open doors to for­eign di­rect in­vest­ment (FDI) in the sec­tor.

Southasia - - CONTENTS - By Muham­mad Ali Eh­san

How well will the real es­tate sec­tor per­form af­ter re­forms?

An idea is some­thing that helps us make our claims and de­fend our in­ter­ests and surely all ideas at the level of the state are linked to the in­ter­ests of the so­cial classes. Ev­ery state – big or small - per­forms three iden­ti­cal func­tions: na­tional de­fence, eco­nomic re­form and tax col­lec­tion. But given the cir­cum­stances and the con­di­tions in Pak­istan (which many peo­ple say is more oli­garchic then demo­cratic) any new re­form seems to ben­e­fit not all the sub­jects of the state but mostly a se­lected class or the state it­self. Ideally a gov­ern­ment should be do­ing all it can to im­prove the lives of the ‘have nots’ but in Pak­istan, con­sid­er­ing that the state is more pat­ri­mo­nial than im­per­sonal, the have nots al­most al­ways live their lives un­der the knife’s edge.

The new prop­erty tax im­posed by the gov­ern­ment on uti­lized plots may be a much de­sired re­form in­tro­duced by the gov­ern­ment to col­lect rev­enue but it looks as if its byprod­uct will be bur­den­ing or­di­nary cit­i­zens, pen­sion­ers, re­tired peo­ple and many others in­volved with real state. While these peo­ple may lose their meth­ods of earn­ing a liveli­hood, the rich and the elite will con­tinue to stay out of the tax net. The good thing is that the gov­ern­ment has agreed to re­voke tax from prop­erty that is val­ued at Rs 4 mil­lion and was pur­chased be­fore June 30, 2013. Now tax will be im­posed on the sale and pur­chase of prop­erty from July 1 2016 on­wards.

Con­sid­er­ing that 60 per­cent of Pak­istan’s fed­eral bud­get is ear­marked for in­ter­est pay­ments, salaries, pen­sions and de­fence and 12 per­cent for sub­si­dies and grants, it leaves only 28 per­cent for other ar­eas. Given the nat­u­ral dis­as­ters and un­fore­seen events, the state finds lit­tle room to cough up the re­quired cap­i­tal for a fis­cally frag­ile econ­omy.

The gov­ern­ment in Pak­istan does not col­lect di­rect taxes and since it has no mech­a­nism in place to do so, it con­tin­ues to re­sort to in­di­rect tax­a­tion. Prop­erty tax is an­other ad­di­tion to in­di­rect tax­a­tion. Al­most 68 per­cent of tax rev­enue in Pak­istan comes from in­di­rect tax­a­tion. An ex­am­ple of this is that Pak­ista­nis pay more for fuel as well as elec­tric­ity than any other coun­try in the re­gion be­cause of the sur­charges added by the gov­ern­ment. This only hurts the poor and lower mid­dle class while the 10 per­cent elite and wellto-do re­main ex­empted from di­rect tax­a­tion. If the gov­ern­ments had been tax­ing the elite class, it would have col­lected enough rev­enue and there would have been lit­tle or no need to run the coun­try through loans and tak­ing aid from in­ter­na­tional or­ga­ni­za­tions. What stops the gov­ern­ment from bring­ing in tax re­form? The sim­plest an­swer to that those with political clout will do noth­ing that hurts their in­ter­ests. Any gov­ern­ment con­tin­ues to fol­low a pol­icy of ap­pease­ment be­cause if it does not do so, it will not have the num­bers that will sup­port it to form a gov­ern­ment and stay in power. The tax to GDP ra­tio in Pak­istan is 9.5% which is amongst the low­est in the world. Pak­istan col­lected $8 bil­lion in to­tal in­come tax in fis­cal year 2013-14, which was just enough to cover the coun­try’s de­fence ex­pen­di­tures amount­ing to $7 bil­lion.

As far as real es­tate busi­ness is con­cerned, the most im­por­tant ques­tion is to find out how well it will per­form un­der a taxed en­vi­ron­ment? Would the pri­vate de­vel­op­ers be able to buy

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