The beginning of Investment opportunities
Since 1996, foreign Pakistanis and stakeholders were permitted various new chances for property investment in Pakistan. This as a result brought funds to the country, mainly in the years 2000 and 2008. There was a remarkable improvement in the country’s foreign exchange capitals. Also the foreign exchange rate of Pakistani currency was retained with this influx of money.
Effects on Economy
Due to this action, many people invested in various projects of the country such as development of residential areas, academies, colleges, hospitals and other huge schemes. Another major facilitator in the financial movement is said to be the real estate business. It also includes the manufacturing areas.
This area opened number of employment opportunities in several associated sectors, enhanced the supply chain value of correlated businesses and was helpful in the collection of significant tax income. A noticeable result of this area’s progress was an exceptional increase in the cost of urban and rural properties.
Influence of financial changes
The investment flooding into the real estate sector has become a safe refuge for the black money launders. As the current rules and regulations in the law provide a loop hole for it to pass by undetected. This is becoming somewhat of an epidemic and is getting out of hand.
The government has tried to take this matter into account by making changes in the financial tax policy. Effective from first of July, new rules have been announced by the Finance bill 2016. It is mandatory for us to review these changes and analyze their effect on the real estate sector. So that people who wish to invest in future, knows about its pros and cons.
The changes in Law
Purchase on property had a holding tax of 1% under section 236-k which was increased. The increase depends on the type of tax payers you are. By definition there are two type of tax payers: filers and non-filers. For filers the tax was increased from 1% to 2% while for non-filers it was increased from 2% to 4%.
Capital Gain Tax (CGT) made 2 chief changes in terms of time frame and fair market value of sale price:
- CGT will be charged at the rate of 10% of difference between the fair market value at the time of sale and purchase. (if property is sold within 5 years of its purchase)
- Fair market value has been defined by the sub section 68 which was inserted by ministry of finance after consulting with FBR. This sub section allows an FBR officer to declare a particular property fair and validate its asset value and fairness which is entrusted to the FBR after approval from state bank of Pakistan.
Secondly the financial clause mentions specifically that the DC rates can not bind the FBR from using its rights for property validation. This has become an important part of the powers invested into FBR. Before this, the commissioner had the power to validate the property according to income tax ordinance but was unable to do so due to some inoperative rights.
To clearly define the administrative amendments mentioned above let’s take the example such as those made in CGT.
For the sale of a 1 canal housing plot in Bahria Town Phase I to VIII, which was bought and registered in the last 5 years, with its current average market value of PKR 20 million, seller will be paying Capital Gain Tax as below:
CGT = 10% of Market Value of Plot (MVP) – Declared Value of plot (DVP) at the time of purchase
DVP (in last 5 years) = DC Rate Value at the time of purchase = approx. 7 million/canal (average DC Rate for Bahria town residential plots in Phase I, II, III, IV and V in the last 5 years)
So CGT = 10% of MVP (PKR 20 million) – DVP (PKR 7 million) = PKR 1.3 million
The Effects of Property Rules
The basic idea behind defining all these rules and regulations is to frame a set of methodology to monitor and control the laundering of black money. It also includes overseas transactions that are being made to keep a regulated overview on the cash flow coming in the country
This has regulated and shaken up huge investors who were harboring there black money in commercial plots. This is however a good news for overseas investors who can now file claims and tax returns. So they easily manage their tax returned annually. And also they can have a fair share in the development and profit siting overseas.
Impact on Black money investors
In the light of the arguments presented earlier here, we can be sure that increase in the black market flooding into the real estate market is eminent which will add a rather shaky effect on the value of the land.
Why will this have influence for black money investors/stake holders? Well because for the fact that it opens the door to invest their money in high value property across the country, make profit on it, making it the best hideout for them. These can be deemed as the secure legal way to wash your money, a safe passage for these investors.
But true question is this what kind of impact would this bring on the short term trading? By short term trading we mean CGT. Which depends directly on the law amendments to be paid. Another question that arises is the uncertainty that is increasing amongst the people overseas about the declaration of their property and assets.
They have become sensitive to this matter as their white money revolves around the danger of being tagged “black” There are measures that have been taken to ensure that the overseas people will have easy access to their assets in the country and will find it simpler to invest in the booming real estate market. These measures include proper paper work, income tax, etc.
What are the white money investors losing?
Technically the market right now due to this flooding in of black money has shown the tendency to decrease the value of their assets. But as experts have foretold that this is a short lived “effect” that would die out soon so the people do not need to worry that they are losing value of their assets. Eventually statistics show that the market will rise slowly and the shareholders would have rise in the value of their valued assets over time.