Impact of Latest Property Tax 2016 on Real Estate Pakistan
Impact of Latest Property Tax 2016 on Real Estate
In the budget 2016 Federal government has increased taxes on the real estate sector. A lot of rumors are spreading in the market about how the real estate market will react to the newly imposed Property Tax 2016. I believe that Real estate is much more dependent on other factors for its growth than the taxes .However it is important to analyze the short term effects of these taxes to find the best time to buy a much more profitable property investment.
The details of the newly imposed taxes by the Government are as under:
1. CGT (Capital Gain Tax)
Payable to the federal government when you file your yearly tax returns by the SELLER as per Property Tax 2016. This tax makes you liable to pay the 10% as tax to the Federal government on the difference of gain between your buying price and selling price at commercial rates. These commercial rates will be evaluated by the licensed state bank evaluators.
Let us assume that you purchased a plot in 2015 at 2 Crores and sold it in 2017 at 3 crores. The price difference is 1 crore, so you will have to pay 10% of total gain in the price etc 10 Lacs as the CGT. The tax is only valid for property sold within first 5 years of its purchase and exempted after 5 years from any CGT. It is also noteworthy that if the commercial prices have not increased than there is no CGT on selling your property.
2. Advance Tax on Sale Section 236 C
Government has increased advance tax on sale as per Latest Property Tax 2016 on Real Estate for a filer from 0.5% to 1 % and for a non-filer from 1 % to 2%, payable as per DC rate and not as per commercial rates as previously rumored.
3. Advance Tax on Purchase Section 236 K
Government has increased advance tax on purchase as per Latest Property Tax 2016 on Real Estate for a filer from 1% to 2 % and for a non-filer from 2 % to 4%, payable as per DC rate and not as per commercial rates as previously rumored.
Aim of the Government
The aim of the government behind increase in Latest Property Tax 2016 on Real Estate are :
- Increase its tax net and revenues on investments made in the real estate sector.
- Increase white money circulation in the real estate sector.
- Redirect the money from real estate into industrial sector.
Effects of Latest Property Tax 2016 on Real Estate
There are a lot of rumors that the latest property taxes 2016 levied on real estate will affect the real estate market negatively. While this seems to be the most simple outcome the truth may be a far cry from what it seems. For us in the real estate market it is a signal to buy more real estate on correction . Real estate is much more dependent on other factors for its growth than the taxes . Growing Economy , Population and CPEC will over shadow the impact of these taxes in the real estate sector.
Who will be effected?
The effects of advance tax on the seller or purchaser are insignificant and will not have any major implications. The CGT, however is scaring most people and rightly so. As per the Federal government CGT will be levied on properties being sold within 5 years of purchase. No CGT will be levied on properties which are being sold after 5 years of purchase. Governments intends to direct the investors to invest their money in other sectors such as industry etc. Therefore creating more jobs and economic boom in the country.
The short term investor is going to suffer and will have to pay 10% of his profits if he sells the property before 5 years. Good thing is he still gets to keep 90% of the profit. CGT will however have minimal effect on medium term and long term traders as the profit margins will be enough to cover up the 10% CGT.
Let us explain this by 3 examples.
Short Term Trader
You buy a plot at 10 Million and you sell it at 11 Million after 3 Months. You will be liable to pay One lacs as CGT. Similarly if you make a bigger trade of 100 Million and sell it at 110 Million, you have to pay 1 million as CGT. You still pocket 9 Lacs and 9 Million respectively making short term trades.
Medium Term Trader
You buy a plot at 10 Million and you sell it at 14 Million after 2 years. You will be liable to pay Four lacs as CGT. Similarly if you make a bigger trade of 100 Million and sell it at 130 Million, you have to pay 3 million as CGT. You still pocket 3.8 Million and 20.7 Million.
Long Term Trader
You buy a plot at 10 Million and you sell it at 20 Million after 5 years. You will be liable to pay zero as CGT. Similarly if you make a bigger trade of 100 Million and sell it at 150 Million, you have to pay zero as CGT. You pocket all your profits.
Conclusion
So it is basically nothing but taxes on the profits you make. As a nation we always run away from taxes and do not consider our duty to pay taxes. Taxes run our country and help build a stronger economy a stronger economy means more real estate demand and spread of money more evenly among the masses.
I do not believe that real estate will be effected by these taxes. Market is bound to see a correction not because of CGT but because it has risen exponentially in the last year. The imposition of new taxes will just act as a trigger to that correction. When the market will recover from this correction in a couple of months, we will see the market rising steadily with natural growth.
Short term traders will certainly have a bit more to worry and as Government perceive they may take their money out of real estate and invest it in other sectors. The big question is where? If not real estate. Real estate has remained the oldest of investments for centuries and I do not believe that some taxes can change that. I also doubt that short term investors will shift their money to other sectors exponentially. The real estate sector in Pakistan remains the safest and secure investment one can think of. So unless Government finds a way to make our industry offer high returns to the investors , these new taxes are just a way to collect more money from a sector which has never been taxed much in comparison to the profits it has to offer.
Read our Market Analysis for July 2016 here
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1717170 ( Whatsapp)
Skype : Shahnawaz.yaqub
Wow worth reading. Can you please suggest me a place to buy in bahria town karachi. I’ll be very thankfull to you. my estimated budget is 8 million. I have visited zemab.com.pk they said 8 million will not be not be enough for investment in bahria town. Is that true ?
Well, this article seems really biased and intends to protect vested interest of property mafia.
Nice article!
How about the Installment plan? Lets take an example…The plot file/form is issued to a person in 2013 and payment is made over a course of 2 years and possession is given in 2015.
In this scenario, the CGT period will start from 2013 or 2015?
The date of transfer of the plot is considered as your date of purchase in your case that will be 2015.
Regards
Oversees Pakistani’s are considers Filters or Non-Filers?
Oversees Pakistanis will have to register here as tax filers , although they dont pay any tax on remittances. They will be considered tax filers if they register.
though an appreciable attempt but over simplification of the tax issue, the basic issue is the declaration of wealth and source of money as most of the people investing in real estate are taking the benefit of the closed eye of taxation network towards this sector from income & wealth tax point of view. Moreover taxation of same property on two different valuations is also seemed legally and logically a far cry and even constitutionally not sustainable at all. So if at all there is a correction ahead it is going to last for a while and will become graver with passage of time mainly because if the law is implemented the real estate will no more be the tax heaven for investors.
Dear Hammad,
The issue here is if people have evaded taxes from other places and invested in real estate , should the government be working on how to stop that evasion or taxing the real estate market ?. Real estate investments come from all sort of people and yes some of it is black money but to punish them all is very unfair.
There is a lot of miscalculation amongst the people about how black money is the only reason for higher plot prices. I will be doing a separate article on it to prove that this is not the case. There is a lot of genuine demand in the market. Black money investments may account for a whole lot of transactions at the moment but only because Government over looked it.
Account for every penny coming into real estate but why tax real estate? If you tax real estate genuine buyers will suffer as well.
CGT is a good tax but should only be applicable if some one is holding properties for the sake of investment only. House you purchase for your own living should not be accounted for in CGT.
We have to be fair. We are not a welfare state like UK. If you want taxes such as in UK than the Government is bound to give you opportunities that exist in developed countries.
Thanks for the discussion.
Your analysis on the impact of CGT does not take into factor a common practice of declaring property purchases on DC rate. The gain tax will be paid on the difference of purchase price (DC rate) and sales person price (market price).
You analysis in long and short term impact does not take into factor the govt policy of retrospective taxation on purchases during last 5 years for a tax filer and 10 years for non filer……in my opinion, if the policy is implemented per se, market prices will gradually come to in great proportions, depending on the speed of activity of the sellers, as purchasers will wait as muschbas possible ….and real estate trading based investment will be reduced to almost nothing
Dear Ahmed,
If some one declared DC rates as his purchase in the past, that is to avoid taxes. The money he may have to pay as CGT will merely be equal to the taxes he avoided earlier. As i commented earlier we need to develop the culture of giving taxes .
Do you really think that all the money involved in real estate is black money? oh i do understand that there is a huge sum of black money involved not only in real estate but in every business in Pakistan. However besides that black money, lots of people do transactions with fairly earned white money.
Also back money from corruption and black money from tax evaders are totally two different things. I believe business owners will not feel much while paying for the tax they avoided earlier.
So in general there will be a correction in prices but not as much as you think . Specially considering DHA Lahore , where we have a lot of genuine buyers , buying in Phase 6 , 7 and 8 . We donot see a correction dip of more than 5 to 10 % at max in worst case .
However Phase 9 prism and Z Ivy green and may be some commercial areas will see a major correction of 20 to 25%.
Regards
Nice
AoA. I do appreciate your analysis. You have not touched one point which requires clarification i.e. A plot purchased on 5 years installment programme with a down payment in 2010 and final installment in 2015. Which date would be deemed as purchased date for the purpose of tax?
Thanks.
Dear Fida,
The actual date of the property transfer is considered as your date of purchase in this case.
I am a tax filer since long. My tax matters also handled by a CA. In tax year 2015 I purchased an Allocation file of a 4 M Comm plot for a price much higher than the DC value. My Accountant insisted to show the purchase value at DC rate. What should I do, should I revise the WTR?
Dear Sultan,
I would suggest that you wait till next week, hopefully things will be more clear by than. We are hoping that this Tax policy will be changed for better. However if you have to take a decision asap, than i do suggest to revise the WTR.
Regards
Dear Sir,
Great analysis and very informative blog. However i would like to ask few questions . How sure are you that Advance Tax is on DC value and not on Current Market Value? Secondly how will it effect people who have bought plots on open File transfer and they sell plots now.
I have heard that Ishaq Dar is meeting Dealers on Monday, when can we except clarity on everything?
Dear Muhammad,
Thank you for your generous comment. We are pretty sure that CVT , Stamp Duty , Advance tax etc will be collected as per DC Value. We are also sure that it is impossible to determine FMV of any plot as there is a lot of variation in a plot price even within one block.
The best possibility is that fair market values will be determined like DC rates and will be applicable for a certain time period. This FMV will be higher than DC rates .
It is impossible to determine an FMV for open plot files etc as the rates are very volatile . So most possibly the DC rates or launch rates of these plots will be applicable in most cases.
Yes we are doing agitation in front of Press club tomorrow at 1530 and yes we are in talks with the Ministry as well. We expect that things may take a week or max two for clarity.
Dear capt sb…aoa…i m an short term investor…i m not agreed with u…coz…slump of property is nt only coz of 1% to 2%..and coz of c g t…its reason according to me is ..commericial market value..& state bank evaluaters..i think 80% investors hav not a huge white money..they buy a plot of 3 crore & show in docoments as 60 lac…so i think 10 yrs before situation..comes back
Dear Imran Sheikh , i have agreed to the same in my article . It is only the CGT which will impact the market. As per present information CVT , Stamp, Advance tax etc will be collected as per DC values . However the FMV (Fair Market Value) will only be applicable while you are paying CGT . In thsi scenario lets assume that two people bought the same kind of the plot in the same price at the same time , one using white money and the other using black money. Where both buy a plot in 20 Million and selling it at 30 Million in a years time
White money guy has shown 20 Million as his purchase and therefore only pays 1 million as CGT.
The guy with the black money showed DC Value of 5 Million as his purchase and once sells will pay CGT of 2.5 Million.
This is what the perception is at the moment but let us wait for clear instructions from FBR and state bank . It is impossible to levy all taxes at FMV .
please explain the role of licienced state bank evaluator
Dear Ahmad Waqqas,
The things are not very clear at the moment , however it seems that once you submit your FBR while selling a plot , these evaluaters will either issue a current FMV ( Fair Market Value) applicable for every quarter or year or may just evaluate on case to case basis .
The exact operation of these evaluaters is not yet clear. I will update soon as we get more news about it.