Pakistan Budget 2021-22 and Real Estate Sector

The cat is out of the bag and now we have a clear picture of Pakistan Budget 2021. There is a lot of confusion and mixed signals we are getting from various analyses. I will try to clarify most of those things. However, before we move on the budget I would like to summarise the construction relief Package and source of income amnesty as well.

Construction relief and income source amnesty

Most people seem to be confused so let me clarify this before moving on to the budget. I will publish a detailed blog on its effect in the near future as well.

The construction relief and income source amnesty were interrelated but two different schemes. While the income source amnesty is effectively finished as of 30th June 2021 for builders and developers, the construction relief and tax amnesty which is provided to builders to file a fixed tax will continue till 31st Dec 2021.

Please note that the income source amnesty is still effective for the investors who plan to invest in construction projects (Buildings or units of buildings) that have already been registered by FBR under the scheme such as Sixty6 Gulberg.

Capital Gains Tax in Pakistan Budget 2021-22

It is the tax you pay on the profits or gains on your property price when you sell it before 4 years. All properties which are to be sold after 4 years are exempt from paying CGT.  In the present budget following has been changed as far as capital gains tax on the property is concerned.

1. Instead of 2.5% tax now you will pay 3.5% tax if you earn less than 5 Million profits on selling your property before 4 years.
2. Instead of 5%, you will pay 7.5% tax if you earn less more than 5 Million but less than 10 Million profits on selling your property before 4 years.
3. For gains/profits above 10 Million but less than 15 Million now you will pay 10% CGT instead of 7.5%.
4. Finally, for all gains above 15 Million, you will pay 15% CGT.

Gain tax on property in Pakistan

Who is affected?

It will only affect people who are selling properties that have been purchased less than 4 years earlier and are being sold between 1st July 2021 and 30th June 2022 on profits/ gains.

Good or bad for real estate?

The impact will be very minimal however, it does show an increasing inconsistency from the Government and there is a likely chance that this will be further increased in the next budget. This may not impact you if you are buying property now but planning to sell it in 2023 because by then we may have revised rates.

Recommendations

1. It is recommended that Government should outline how it plans to increase this Capital gains tax in the coming years. So that we are not caught off-guard in the future.
2. For all of the investors out there real estate still offers the lowest Capital gains among all industries so pay the damn tax. It is good for your country and a healthier economy is ultimately good for real estate.

Rental Income Tax Budget 2021-22 Pakistan

All your rental income will be taxed on yearly basis as under:

1. No tax on your rental income on the first 3 lacs.
2. No tax on the first 3 Lacs than 5% tax on the rental income between 3 Lacs to 6 Lacs.
3. For rental income between 6 lacs to 20 lac, there will be no tax on the first 3 lacs, then 15000 on the rental income between 3 to 6 lacs, and then 10% on the amount above 6 lacs.
4. Finally, if your rental income is above 20 Lacs, you will pay as per point no 3 mentioned above till 20 lacs and thereafter you will pay 25% on the rental income you are earning above 20 Lacs.

Who is affected?

Of course, all those who have rental income-generating properties.

Good or bad for real estate?

The tax on rental income has been considerably reduced from last year, except for the bracket between 20 Lacs and 40 Lacs, where the effect is almost similar. It is generally a good sign of things to come and should help lift the construction industry which is developing rental generating properties as well as developed areas.

Recommendations

I highly recommend that the tax on rental income should be capped at 15% instead of 25%. A lower tax rate will encourage people to pay taxes rather than avoiding them through unfair means.

Income through property

Now comes the part which is not yet clear as the Government or FBR has so far failed to provide how it is going to police this. So far the interpretation is that anyone who is actively involved in real estate trading will have to pay 20% tax on their income. This will generally not concern an average person but is related to realtors and registered companies doing property as a business.

As more clarity is still needed and it does not involve an average person, therefore, we will leave it as it is and not discuss this further.

Public spending development programs (PSDP)

Now, this may not seem to be directly related to real estate but infrastructure development is going to support the real estate sector in a big way. In budget 21-22, the Government has reserved 900 Billion rupees, an increase of 40% in PSDP projects from last year. This means we are going to see a lot of new infrastructure being built, such as new roads, overhead bridges etc.

Wherever infrastructure develops real estate booms. It will be interesting to look at these projects once approved and you can certainly expect real estate around such projects to make good gains.

Low-cost housing (Naya Pakistan) & Bank financing for real estate

The budget has further reinforced the Governments resolve to continue with low-cost houses while improving the bank financing structure for real estate in the budget of 2021-22. Although it may not directly affect investment-oriented properties, I believe these policies will have an overall trickle-down effect on real estate as well.

The final verdict

It is a very balanced budget and without any big surprises. In general, it will bolster the countries growing real estate sector, yet keeps a check on the price bubble. However, if looked at carefully it will give you an insight into future plans of the Government so that you may align your investments with these changing policies.

Although not part of the Pakistan budget 2021 – 22 the end of income source declaration amnesty is going to shift the momentum of investments from plots towards construction projects. This is also the Government’s objective by design, as the income source amnesty is now only valid in projects registered already by FBR under the scheme.

In general moving into the future, I would say that the budget is very friendly for the following sectors of real estate:

1. New or old societies being developed which may be supported by the new infrastructural projects being launched under PSDP.
2. Highrise and construction projects that are registered with FBR, which allow first purchasers to not declare the source of income till 31st March 2023 under amnesty.
3. Rental income properties as the tax rates have been lowered and maybe lowered further in the future.

Capt (Retd) Shahnawaz Yaqub Bhatti

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