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.
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