The commonly held belief that the real estate sector is a conduit for generating and legitimising undisclosed income, often referred to as “black money,” has gained widespread acceptance, yet it may be subject to misinterpretation. To fully understand this issue, defining “black money” is essential. Black money means the income derived from illegal activities not reported for tax purposes.

In the context of real estate, investors’ funds are legally obtained and are not inherently illegal in nature or intent. However, the discrepancy arises in applying property valuation rates, such as the District Collector(DC) and the Federal Board of Revenue (FBR) rates.

These rates, meant to standardise property valuations, often fail to reflect the dynamic real estate market, leading to discrepancies between official rates and actual market values. This practice, known as under-invoicing, is highlighted in estimates by the Pakistan Institute of Development Economics (PIDE), suggesting that properties are often recorded at 50-60 per cent less than their actual market value due to the rigidity of the prescribed rates.

The infrequent updates to these rates exacerbate this issue, often resulting in their undervaluation compared to real-time market prices. Consequently, in real estate transactions, buyers and sellers commonly agree on a property market value but report a lower value on official documents to adhere to the DC and FBR rates, thereby avoiding taxes.

The adoption of Blockchain technology could stop illegal property possession by requiring verifiable ownership records

This gap between reported and actual transaction values creates what is termed as “undisclosed excess” or “black money.” It’s important to recognise this excess amount is not inherently illegal or intended for illicit purposes; it is a byproduct of deficiencies in the taxation system. The critical query is the rationale behind the state’s insistence on maintaining these rates instead of allowing market forces to determine them.

According to Nadeem Ul Haque, Vice-Chancellor of the PIDE, these rates persist largely due to the dominant authority of FBR and district management group (DMG) officials over the public, presenting potential exploitation risks for investors.

Another perspective suggests that taxation is a provincial matter. Authorities believe that not standardising these rates could impose excessive financial burdens on the state, particularly when acquiring properties for public purposes like roads, parks, hospitals, etc.

However, this argument appears flawed, considering that while government expenditure on property acquisition might increase, it is not a frequent occurrence, whereas the tax revenue generated from higher property values would provide a consistent fiscal benefit.

Conversely, this situation creates a dilemma for property sellers who lack a reliable method to assess the value of their properties. In Pakistan, the comparable method — valuing properties based on similar sales in the vicinity — is ineffective due to the unique nature, size, structure, and features of each property.

This issue is further compounded when any group of investors is going public on the stock market in the form of real estate investment trusts (REIT). They are hesitant to establish REITs and list them on the Pakistan Stock Exchange.

The primary concern is the requirement to disclose the accurate value of their properties. Given the prevailing undervaluation trend, reporting properties at market rates is rare, leading to significantly lower valuations of their properties in share form, resulting in a direct financial loss to promotors of the initial public offering. This situation underscores the need for a more rational and market-aligned approach to property valuation in Pakistan.

The government is poised to instate regulatory measures in the market by introducing the new policies as discussed by the chairman of the National Accountability Bureau. While this initiative is anticipated to impact plot file titling, transparency, and accuracy positively, it may concurrently pose challenges for the overall market.

Rather than exerting direct control over market valuation, a more favourable approach involves empowering the market to determine its trajectory. This necessitates the implementation of technological interventions, specifically the integration of blockchain systems.

Blockchain, with its inherent attributes of openness, decentralisation, and continuous competitive record validation, serves as a robust solution to address prevalent issues in the market. In an open public blockchain ledger controlled by FBR for tax purposes, transactions are securely stored across multiple computers in a peer network.

To safeguard against tampering, transactions are periodically grouped into blocks, each assigned a unique hash identifier. Each block not only contains the most recent transactions but also establishes a link, through the previous block’s hash, to information from all preceding blocks, forming a chain called Blockchain.

The adoption of blockchain technology enables the government to curtail illegal property possession, as individuals cannot engage in fraudulent transactions without a verifiable record of ownership within the system. Moreover, in transactions between two parties, the supply and demand sides, blockchain verification by a distributed group ensures the legitimacy of property supply and ownership. This mechanism prevents housing society owners from perpetrating fraud through oversold or misrepresented property files.

The writer is an assistant professor at the National University of Modern Languages, Islamabad.

Email: [abwahid.fms@gmail.com][1]

Published in Dawn, The Business and Finance Weekly, December 18th, 2023