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Reassessing Property Taxation for Enhanced Revenue Generation in Pakistan

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Zafar Iqbal

The recent surge in property investment by Pakistanis in Dubai, totalling over $11 billion, has triggered concerns about capital flight from Pakistan and the adequacy of property taxation within the country. With the impending 2024-25 budget presentations by the Federal and Provincial Governments, it is crucial to explore the potential of property-related taxes to generate additional revenues in a progressive manner. The time for action is now, and your role in this process is vital.

This article aims to accomplish three major objectives. Firstly, it seeks to quantify the magnitude of the real estate sector and its allure for investments at the expense of other more productive sectors. Secondly, it aims to identify the array of property-related taxes at the Federal and Provincial levels and assess the current revenue generation. Lastly, it endeavours to pinpoint the ‘tax gap’, which refers to the difference between the potential tax revenue and the actual tax revenue collected, and propose strategies to significantly boost revenues from the property sector.

According to the Pakistan Bureau of Statistics (PBS), the rental value of the real estate sector, along with the imputed value of owner-occupied properties, accounted for a significant 3.5% of the GDP in 2023-24, amounting to Rs 3705 billion. The real estate sector has exhibited a faster real growth rate of 3.7% since 2017-18, surpassing the overall GDP growth rate of 2.6% and that of the large-scale manufacturing sector, which stood at a mere 0.6%. This underscores the importance of our focus on property taxation reforms.

Evidently, the low tax burden in the real estate sector, as compared to other sectors like large-scale manufacturing, has led to a diversion of private investment towards property. This is reflected in the fact that, in 2022-23, private investment in real estate surpassed that in the large-scale manufacturing sector by over two-and-a-half times. While private investment across various sectors has declined, real estate investment has experienced a notable 20% increase.

The current incidence of property taxes in Pakistan includes taxes at both the Federal and Provincial levels. At the Federal level, these entail income tax on rental income, capital gains tax, and advance taxes on property sale/purchase. On the Provincial front, there are the urban immovable property tax and the stamp duty on property transactions. Additionally, the Provincial governments are empowered to levy a capital value tax on property, as per the constitutional provisions of the 18th Amendment.

Assessing the tax revenue breakdown, the total collection from property-related provisions in the Federal income tax stood at Rs 154 billion in 2021-22, accounting for only 6.7% of the total income tax revenues and merely 4.5% of the national rental value of properties. Moreover, the combined collection from stamp duty and urban immovable property tax at the Provincial level amounted to less than Rs 80 billion.

Recognizing the progressive nature of property-related taxes is vital, with 63% of urban rental income being attributed to the urban segment and the top two quintiles accounting for 62% of rents. A preliminary assessment projects a potential revenue of Rs 100 billion from the urban immovable property tax, surpassing the cumulative collections of all Provincial Governments.

Expanding the fiscal scope at the Federal level is crucial. Currently, the rental income tax generates less than Rs 30 billion and is subject to separate tax brackets, with an exemption limit of Rs 300,000 and marginal tax rates ranging from 5% to 25%. Incorporating property income into other income for tax purposes, enhancing monitoring mechanisms, and curbing underreporting and tax evasion could substantially elevate tax revenues.

Developing the capital gains tax on property is also imperative. The existing provision granting exemption after a six-year holding period and the relatively low tax rate need revision. Comparable to India’s 20% long-term capital gains tax on property, aligning policies could result in significant revenue amplification from capital gains tax and advance tax on property transactions.

The urban immovable property tax currently faces a severe development deficit. Combined revenue collection by the Provincial governments is less than Rs 14 billion, representing a meagre 1.5% of the rental value of sizable urban properties. The failure to update assessed rental or capital values of properties by the Provincial Excise and Taxation departments has substantially diminished revenue yields. Positioning the urban immovable property tax as the primary revenue source for urban local governments is vital, particularly with the abolition of the octroi tax and the eminent need to augment municipal revenues for improved urban services.

The forthcoming Federal budget for 2024-25 should consider pivotal measures to revamp property taxation. These may include subjecting capital gains on properties to a 10% tax rate, irrespective of the holding period, and integrating rental income with other income for Federal tax purposes. These reforms, if implemented, could significantly enhance revenue generation and create a more equitable tax system. Additionally, initiating a reassessment of property values by the Provincial Excise and Taxation departments during 2024-25 is imperative.

In essence, comprehensive property taxation reforms are critical to promoting a more progressive tax system in Pakistan. Implementing adequate property taxation would contrast starkly with regressive measures, such as the proposed increase in the sales tax rate on goods. It is high time for the affluent property-owning segment to make a commensurate contribution to tax revenues.

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