Effect of Tax amnesty on Pakistan property

Effect of Tax amnesty on Pakistan property

It is clear that the Government has agreed to offer tax amnesty to the real estate sector . The details of the amnesty scheme are not yet officially announced by the Government as the proposal is to be approved by the Parliament first. It is however expected to offer the much needed relief to the property market. In addition real estate stake holders are pushing hard for more relief than already proposed. What will this mean for the real estate market ? and how positive is the effect of tax amnesty is yet to be seen. However as a smart investor you can speculate before time and use the information to your advantage.

Real reason behind the property prices drop

I personally consider the present drop in property prices as a correction phase. Correction phase usually occurs when the prices of a commodity increases more than its real value. This has been discussed time and time again in our analysis of the property markets as well. We have also discussed why real estate will continue to grow in long term regardless of the impact of property taxes .

Some of you asked me if this is all true than why the drop in property prices?. I will explain the real reasons of the drop in property prices in detail in a future article. In general however the price drop is mainly because of the highly inflated prices in certain sectors. This investment bubble was created by real estate agents and traders who benefit from short term price hikes.

The taxes obviously did not benefit these short term investors and they could see their profit margins shrinking. In addition some of the tax evaders and black money investors had a run for their money as the Government showed its resolve to tax them heavily. The noise made by these effected groups was enough to push the property market towards a stand still.

What is the latest tax amnesty

Pakistan is a country where the people are not used to pay taxes, therefore bringing them in tax net will take some convincing. Government failed to take this into account and is considering to back track from the earlier stance. The tax amnesty scheme is basically a step in that direction. It will allow investors to convert black money into white by paying a very minimum amount of tax. The Government intends to lure more people inside tax net by doing so. It will be too early to discuss the details of tax amnesty at this stage as the proposal is still being finalized. However in general, if you pay a little amount of tax on the property you have purchased before 1st July  2016 Government will not ask about the source of the funds. No further details are available to suggest, if the amnesty will also apply to the buyers who want to purchase property now.

Will it effect property positively ?

This is the big question and my answer is YES. Lets discuss the effect of tax amnesty one by one in detail.

1. It will bring a sense of security among investors that they will not be questioned about the source of the money. It will also eliminate chances of any legal/criminal proceedings against tax defaulters and investors. They will have to pay tax on it though and is a win win situation for both the Government and the investor.
2. Real estate market works on speculation and this is a good time to do that. Effect of amnesty scheme even if it does not address all the issues will be positive, as undoubtedly it will provide some relief.
3. The amnesty scheme will certainly add some needed fuel to property market. Government is under a lot of pressure to take some positive measures and help the property sector.
4. It will act as a confidence building measure for the real estate agents and short term traders to get back in the game.
5. Tax amnesty will not give a rocket boost to the property prices. In a bigger perspective property market is in a correction phase after a huge investment bubble in 2016. Property will however stabilize and shift to genuine growth rather than investment bubbles.

These are mere speculations based on the information we have now and it seems pretty positive for the market.

Recommendations and advise

1. Invest in safe sectors which provide genuine growth . I still believe that 9 prism will go down further specially the commercials. When it comes to DHA Lahore , we believe that phase 8 is the only strong candidate for genuine growth in near future. Trading of commercial files in DHA Lahore is also gaining momentum and will continue to do so.
2. Gwadar is another safe hub which we believe has a lot of potential . Sanghar housing society and Jinnah Avenue commercials are my personal favorites
3. Do not listen to the market noise and rhetoric. There are a lot of rumors to misguide you because of lack of information and experience.

I hope that this information will help you to choose wisely. Please feel free to update us in the comments below and share your opinion if you come across some new information .

Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1717170 ( Whatsapp)

Skype : Shahnawaz.yaqub