2019-20 Pakistan Budget and effects on real estate

2019-20 Pakistan Budget and effects on real estate

Budget 2019-20 has been announced and as expected there are some changes and reforms for the real estate sector. This is nothing new and since 2016 we have told you repeatedly that the Government plans to introduce reforms slowly over the next coming years. However in this budget it seems like those reforms may come to an end and we may finally see stability in the real estate sector. The present reforms in real estate in the budget 2019-20 is a mixed platter and is a continuation of the polices we have been seeing since 2016.

Clarity does not exist in some of the proposed reforms in the budget regarding real estate sector, however by the end of this month we are hopeful that everything will be out there in black and white. Let us have a look at some major changes proposed in the real estate sector. We will also separate these reforms in 3 sub divisions, positive, negative and neutral as per there impact on the market.

Positive Reforms

1. 236 W, paid by the buyer and normally known as super tax has been abolished, this was the 3% tax levied on the differential of DC and FBR values. I have always considered it an unfair tax for filers and has now been finally removed for good.
2. 236 k, paid by the buyer and normally known as withholding tax has been reduced to 1% for filer and 2% for non filer from 2 and 4 percent respectively.

Neutral Reforms

1. Non Tax filers can buy property above 50 lacs, however they will have to declare the source or file returns within 45 days of purchasing the property. The exact details are still unclear therefore we will update you when we have some details in black and white.
2. Cash transactions while buying property above 50 Lacs will be considered illegal and subject to 5% penalty etc. Exact details are still unclear, however this was already being followed to an extent so will have minimal effect on real estate.
3. FBR values to be increased to 85% of the property values in general. The new values are yet to be identified and therefore we can only comment on it when that is done. However it will not effect the transfer cost as 236 W and 236 K have been abolished and reduced respectively.

Negative Reforms

1. Government has proposed to increase the Capital gains slab to 10 years rather than 3, however it is still unclear at which rate it will be charged. There is also a confusion that it will be charged as per the income tax slabs at 100% in first year and at 3/4th rate after first year, however it is not possible because real estate transactions are not time barred and therefore most possibly the rates will be fixed and vary according to years. However it is still unclear how it is going to be charged and therefore we can only comment on it further when more details are available.
2. Withholding tax period 236 C on sellers to be charged irrespective of the holding period.
3. Withholding tax to be collected regardless in all properties above and below 4 Million.

Analysis

Presently it is a bit premature to give any analysis on these reforms and it will only be possible after all details and procedures are clearly laid out in black and white. In general however I feel that there are not a lot of changes and it is continuation of the old policies with some cosmetic changes.

Transfer Costs

Abolishment of 236 W and reduction in 236 K will bring down the transfer cost considerably. However increase in FBR values will slightly balance that out, but I still believe that in general the property transfer costs will reduce as FBR values are already at 70% of property values in most cases, thus it is great for investors and genuine buyers.

Recommendations for the Government

There are a few issues where I feel the policies have been developed without consultation and without considering the ground realities. We must remember we live in a country where 90% of the people do not pay taxes and are not even educated about them, where corruption is deep rooted and all institutes who are responsible for taxation are no exception. Automation and fixed taxation is the only solution

Fixed Taxation Solution

It is much better for a country like us to have fixed taxations rather than voluntary declarations so that taxation is automatic with as minimum interference from such departments as possible.

Non Tax Filers

Non filers as long as they are not public office holder should be allowed to buy any property considering that they pay 5% of FBR value in addition to the normal taxes to the Federal Government. There should be an increase of 1% every year till a maximum of 10% in next 5 years in this rate to motivate people to get benefit of the scheme as early as possible.  This comes in line with the existing amnesty scheme and actually a much better option than that because the average people will happily pay this as they will have a sense of owning a property, rather than just depositing the money in Government accounts.

Capital Gains Tax

I feel that the Government has over complicated an already simple process specially in terms of CGT. It would have been much better to do lay down a fixed 10% CGT for first year and thereafter at 5% fixed slab for the remaining period on difference of capital gains in FBR values. This entire exercise by the Government may be a bit counter productive at the end of the day as no one will really pay this. It is far easier to not declare any gains and therefore fixed taxation is the only solution and offers more stability to the real estate market as well as more revenues for the Government.

Developing Tourism, Industrial and Services Sectors

One of the main motivation for the Government to discourage real estate investment is to force them to invest in other productive sectors. However this approach is counter productive as real estate is a fundamental security and no matter how much it is discouraged, we are hard wired to own property. The only thing which can effect people to change there mind is to make other sectors more lucrative by giving subsides, facilities and tax waivers.

Once the people realize that investing money in other sectors is more profitable and safe they will certainly move there money from real estate. As for real estate sector it will always flourish as a developing economy means more distribution of wealth and therefore a larger client base.

I hope this helps you understand the 2019-20 Pakistan budget and effects on real estate and as soon as we have clear details we will share with you.

Captain (Retd) Shahnawaz Yaqub Bhatti

Founder and CEO at Imlaak

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