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ABAD Proposes Major Tax Reforms to Boost Real Estate Investments

ABAD

The association of builders & developers of Pakistan (ABAD) has formulated a couple of fundamental reforms in the current tax policy imposed by FBR on real estate sector of Pakistan which has negatively affected this affluent sector over the past 2 years. This new proposal by ABAD has been submitted to FBR to be incorporated in the fiscal year 2018-2019, so that FBR can attain its targets without jeopardizing the investment volume.

It is a fact that short term investments have virtually vanished due to the heavy withholding taxes and capital gain taxes imposed by FBR. Earlier, you could buy a plot at 50 lacs, and sell at 53 or 54 lacs within 2 to 3 months to earn net profit of 2 lacs or so after deducting transfer charges, commissions and stamp duties. But after the imposition of withholding taxes on sale and purchase, you have to pay approximately 6% tax if you are non-filer, while transfer fee, stamp duties and commissions are additional. If you calculate the total cost, you may hardly be able to save some significant amount in the end.

In short, people have to pay more in taxes than they can earn, which has ultimately caused them to refrain from short term investments, which slowed down the trading activity in the real estate market. Files & other cheap options still seem feasible for investments, as you normally save taxes, however rate of return in files is not so significant and risk is much higher.

Similarly, cost of construction has increased due to regulatory taxes on building materials which directly affects built up property prices. Also the tax system imposed on builders and developers needs some major reforms so that builders can play their role affectively.

Coming back to the topic, we have taken out some important points from the proposed tax reforms for our readers, so that they can understand what ABAD demands from the government.

Withholding and Other Taxes

ABAD suggests that all the properties worth less than 80 lacs should be exempted from withholding taxes. As withholding taxes directly add to the cost of buying and selling, they should be fixed to 1% for filers and 2% for non-filers.

Regarding CVT, Stamp Duties, Registration charges, and Town taxes, overall value of these taxes should amount to 1% of the total sale value of property.

Fixed Tax Regime for Builders & Developers

ABAD demands fixed tax regime for builders and developers, that was introduced in 2016, but abolished in 2017 by Finance Minister. In fixed tax regime, the tax liability was based on the locality and square footage of area developed/constructed, while normal tax regimeĀ applies to the income of builders and developers.

ABAD also demands that online tax collection system should be introduced under fixed tax regime in order to avoid corruption through personal contacts between tax payers and tax collector.

Amnesty Scheme

ABAD suggests that the government should introduce amnesty policy for overseas and local investors who are investing for the first time in the construction industry. Under the amnesty scheme, the government may not inquire about their sources of income for at least 3 years, so that they can safely invest their money, whether black or white, in the construction industry and play their role in the growth of this sector.

Property Valuation System

According to ABAD, the government should introduce a uniform property valuation system instead of the 3 parallel valuation systems. Earlier the sale value and DC rates were considered, but now FBR has introduced their own valuation rates that has complicated the valuation criterion.

Regulatory Duties on Steel

ABAD has suggested to withdraw regulatory duty and additional regulatory duty on the basic raw material “steel” used in constructions. As per ABAD, the construction cost without these regulatory taxes will come down by 15% that will benefit general public as well as builders.

Following is a copy of news report on this issue:

ABAD proposal on tax reforms