Controversial property revaluation

Controversial property revaluation

While the financial managers of the PTI government are new in the throes of an untimely mini-budget to fulfill the IMF conditionalities that insist upon cool down the overheated economy that proved more harmful than beneficial as claimed by the current financial team that is now struggling with the renewed economic challenges.

The new steps are aimed at attempting to reverse the effects of the federal government’s pro-growth budget for Fiscal Year 2022 that was adopted by the new management team that wanted to prove its economic mettle without realising that short term measures in the wake of a long-term malaise usually backfire, which they have.

In this context as a measure to boost taxation earnings the government has revised upwards the valuation rates in the real estate sector to 90 per cent of the market level for calculation of tax in 40 major cities of the country including Karachi, Lahore, Peshawar and Islamabad.

The number of cities in the list was increased from 20 to 40 to increase the tax collection from transactions in the real estate sector. At the outset the new valuation rates significantly narrowed the gap between the market prices of immovable property and the rates at which the FBR used to tax such transactions until now.

Even where properties were already being taxed on the basis of the 2016 valuation tables, the FBR has extended the coverage of withholding tax and capital gains to areas that remained outside their scope so far. The fresh valuations cover all types of immovable properties.

Economic observers have always impressed upon the need for revising the valuation tables due to a massive spike in property prices in recent years and the IMF had also been pursuing the FBR to revise the valuation rates in accordance with the new market prices.

The move could be an important step towards the documentation of real estate and construction industry and may discourage the parking of illicit money in property.

Global experience shows that property taxes are perhaps the most important levy that can improve the quality of public services and bridge the service delivery gap in the urban areas.

In Pakistan, the yield from taxes on urban immovable property has historically remained negligible because provincial governments always balk at taxing property, just like agriculture income, for fear of a popular political backlash, or under pressure from large investors and developers.

However as is the wont in Pakistan, the FBR decision to reassess and revalue the existing rates has become controversial compelling the FBR to hold this process in abeyance until 16 January, 2022 in the wake of an extraordinary rise in property rates and complaints from realty stakeholders.

The FBR received complaints from across the country from various stakeholders, including real estate agents and town developers about an extraordinary rise in property rates resulting from the recently notified property valuation.

Moreover, a parliamentary panel ordered withdrawal of 100-700 per cent increase in valuation of immovable properties in the country’s 40 urban centres for the purpose of tax collection.

The Senate Committee on Finance and Revenue dealing with this aspect directed the FBR to come up with a revised valuation table in consultation with all the stakeholders within 15 days.

The committee mentioned that it was inappropriate on part of the revenue authorities to take steps without taking relevant stakeholders in confidence and such policies were neither in the interest of the businesses nor the FBR itself.

The committee added that business transactions required time to materialise and hence there should also be a mechanism and time frame under which the deals finalised before the new SRO remains unaffected.

The decision-making should be based on involvement of stakeholders but economic improvement and revenue growth could not be expected when there was trust deficit between the government agencies and the stakeholders. In this context it directed that during the consultation process for a new mechanism, previous regulation and arrangements should be put in place so that businesses can run as usual. For all the future regulations the FBR should provide ample time to the industry for compliance and adjust their businesses accordingly.

FBR tried to clarify the perspective by stating that the objective of the revised valuation of the properties was to gradually tax immovable properties on the basis of market prices.

It was mentioned that until few years ago there was no proper system of real valuation of properties and the provinces were not ready to reach a consensus, therefore, the FBR was entrusted with the responsibility.

It was stated that the property prices set for the first time during the government of PMLN and a tax amnesty scheme was also offered on the basis of these prices.

It was added that the FBR had set best possible property evaluation in the given circumstances but there was still possibility that valuations for some areas may be higher or lower and hence the FBR was ready to review these valuation tables.

The members of the senate committee observed that there was no proper mechanism for property valuations but it was not possible for the parliament to rubber stamp whatever the government comes up with. It was accordingly suggested that there should be some formula and independent assessment of values to ensure a fair property valuation and resultant taxation.

The representatives of property dealers and Rawalpindi and Islamabad Chambers of Commerce and Industries said the FBR had imposed new valuation tables without taking them into confidence that has halted all property transactions.

They said the people had signed sale purchase contracts but were shocked at the time of transfer that their tax rates had increased by 100 to 700 per cent.

They also pointed out that no transaction could be actualised since the SROs were issued on 1 December and some property valuations were so absurd that the customers were ready to sell their assets at less than half the evaluated price to the government.

Responding to these issues the FBR constituted valuation review committees (VRCs) and any stakeholder having any reservations over the valuations may lodge a representation before the VRC by 15 December. The senior FBR officials will undertake meaningful consultative processes with the stakeholders and engage the SBP-approved valuers for determination of values, which could be either more or less than the lately notified valuations.

The FBR has already announced engaging top property valuation experts of the State Bank of Pakistan who will hold meaningful consultations with the key stakeholders, including real estate agents and town developers. This consultative process will review such cases individually and thereby make necessary recommendations to remove distortions if any and bring property value near market price.

Though the FBR issued detailed instructions through an office memorandum on the procedure to be adopted to review the anomalies in the property rates and rationalise the same but now it has been decided to review and revisit the notified valuation tables wherever overvaluation or undervaluation is pointed out by a stakeholder.

In this respect, the VRCs will take a decision on the representations by 10 January, 2022 and forward the same to the FBR for notification. All recommendations made by the VRCs on revaluations will be re-notified on 15 January, 2022, which will come into force on 16 January.

In the meantime, SRO1534-1572(I)/2021 is held in abeyance to allow registration of in-process transactions.

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