ISLAMABAD: The government on Saturday granted a tax amnesty scheme to the real estate sector and massively lowered its future income tax burden, ending a month-long gridlock that adversely affected the business.
Finance Minister Ishaq Dar announced the agreement with the real estate sector in the presence of all stakeholders. The new package, according to some experts, is even worse than a general amnesty due to its far-reaching implications for past and new property transactions. It is the third amnesty scheme in the last as many years.
A move that began a month ago to collect taxes from the realty sector at ‘fair market value’ ended up whitening an estimated Rs7 trillion wealth in one go. However, Dar insisted that it was not an amnesty scheme.
Builders reject proposed amnesty scheme
Both sides reached the agreement after negotiating for a week and gave major concessions to each other. Prime Minister’s Special Assistant on Revenue Haroon Akhtar Khan and Ashfaq Yousuf Tola, a member of the government’s Tax Reforms Implementation Committee, played a critical role in clinching the deal.
Dar called it a “transparent deal which will end blackmailing and mark the beginning of a new era.”
However, the ‘surprise treat’ for the real estate sector was the government’s decision to massively lower the capital gains tax (CGT) on profits made from the real estate transactions. As of Saturday, the gains made by selling properties within 5 years of the holding period were subject to 10% CGT.
Now the government has announced to reduce this period to only three years, which means that there will be zero tax on profits made after three years. Second, the rate for those who sell the properties after two years but within three years has been cut to only 5%. For those who sell their properties after one year but within two years, the new rate will be 7.5%. For those who sell properties within one year of purchase, the rate has been kept unchanged at 10%.
Real estate sector representatives hint at giving strike call
The government’s single achievement is that it convinced the real estate sector representatives to new market value rates, which on an average are 200% to 800% higher than the deputy collector (DC) rates used to work out the withholding and capital gains taxes. Only for Phase-VIII of Karachi’s Defence Housing Authority, the new rates will be 20 times higher than the DC rates.
However, these rates are still many times lower than the fair market value rates. The decision marks a retreat from the government’s earlier stance to tax the real estate sector on fair market value basis.
From July 1, the government had implemented a new law that authorised the State Bank-nominated valuers to determine the fair market value of the properties for working out tax liabilities. Dar announced that now instead of the SBP-nominated valuers, the new property valuations, agreed between the FBR and real estate sector representatives, will be notified by the FBR.
Real estate set to win biggest tax amnesty
Dar said, “Appropriate legislation will be done to give effect to the proposed changes as agreed with all stakeholders”. He said a presidential ordinance could be issued any time before the National Assembly Session that the president has convened on Monday.
“There is no legal bar on promulgating an ordinance before a parliament session but issuance of an ordinance two days before the National Assembly session is against the jurisprudence,” said Supreme Court Bar Association President Ali Zafar.
Dar insisted that the government has not given a tax amnesty on the past transaction but at the same time said that section 111 of the Income Tax Ordinance is also covered under the new deal.
“Section 111 deals with unexplained income or assets and exemption from applicability of section 111 means protecting black money,” said Supreme Court lawyer Dr Ikramul Haq.
Real estate sector, govt close to breakthrough on controversial tax decisions
Dar said that if the period is less than 3 years of the properties acquired before 1 July 2016, the 5% CGT will apply. He said that if the holding period is more than three years, there will be no CGT. To a question whether the government would inquire source of income invested in past, Dar said that “we should look forward.”
Dar said the basic threshold of Rs3 million for application of withholding tax on purchase of immovable property has been enhanced to Rs4 million. Dar said the new valuations have been agreed for major cities. The minister said that till such time and for those areas for which no valuation tables are notified, the existing DC rate will apply.
Courtesy : Express Tribune