The most fundamental reform announced in the new tax amnesty scheme — and later incorporated in the budget for the next fiscal — seeks to discourage the use of real estate as a parking lot for tax-evaded and illegal money, and to expand the existing, narrow tax base.

But many are sceptical of the success of the scheme, insisting that the government is unlikely to achieve its targeted results. Opinion also remains divided on the potential impact of the proposed reform on the real estate market as many believe that it could dissuade overseas Pakistanis from sending money back home for investment in property.

To begin with the new incentives offer non-taxpayers a way to legalise their existing undeclared assets at home (and abroad) by paying a nominal tax.

From next financial year, however, those, including non-resident Pakistanis, buying property worth more than Rs4 million will have to be tax filers in Pakistan. Further, the federal government has reduced the adjustable advance income tax rate to just one per cent of the price of the property declared at the time of its registration.

The provinces have also been recommended to cut their total (un-adjustable) property registration tax to one per cent and abolish other levies like stamp duty, capital value tax (CVT) and so on. This will significantly slash the total burden of non-adjustable and adjustable taxes on registration of a property to one per cent each.

“You may see a correction going forward in the present price of properties whose rates are higher than their actual (market) values because of illegal and tax-evaded money parked there,” says an analyst

In order to ensure that the properties are registered at their market value, the government also proposes to do away with the current Federal Board of Revenue (FBR) rates implemented for the purpose of charging advance income tax and (provincial) DC rates — used to calculate provincial taxes and levies.

The scheme gives the government the right to acquire any property within six months of its registration by paying 100pc more than the registered price from the next fiscal. This assumes no one will register a property for less than 50pc of its market value.

For properties registered after July 1, 2019, the government will have the right to acquire them by paying 75pc more than the registered price and for properties registered after July 1, 2020, the pre-emption rate will drop to 50pc and stay at that rate for future years. Policymakers expect these actions will ensure that properties are registered at 67pc of their actual market value.

The measures are almost a replica of a similar initiative implemented in India.

“This will be a revolution in the real estate market and help document the economy, create legal wealth in Pakistan and make available billions for new investments,” notes a KPMG Taseer Hadi & Co analyst in his comment on the scheme.

“We believe that a lot of people will want to take advantage of this scheme though we see the number of transactions rising before the start of the next fiscal as people are scared of the change and will most likely prefer to enter into real estate before the new rules take effect.

“Those still willing to remain non-filers will go for properties priced less than Rs4m but will have fewer choices.”

It goes on: “You may see a correction going forward in the present price of properties whose rates are higher than their actual (market) values because of illegal and tax-evaded money parked there.

“The smaller and cheaper properties will however remain stable and may see a small appreciation in the price with the passage of time. We expect the people to get used to the new regime and investors to feel more comfortable dealing with a simpler and systemic tax system.”

But he agrees that it will be difficult for the federal government to convince the provinces to cut their taxes and levies to just one per cent, something which is crucial for its success.

The property market tax reform is not the first effort being made by the Pakistan Muslim League-Nawaz government to tax the real estate market and discourage parking of ‘black’ money in the sector. None have succeeded in delivering the desired results though.

A leading businessman, who has interests in textiles and real estate in Lahore, expressed his strong reservations about the new tax scheme to force non-filers to become part of the tax net.

“None of the measures announced by the government in its tax amnesty scheme or in the next budget address the real question: Why non-filers agree to pay double the tax but do not want to become part of the country’s tax system? Why taxpayers are opting out of the tax net? Unless the real issues that are keeping people out of the tax net are addressed no incentive or punishment will work.”

He was of the opinion that the new reform will only result in a decline in remittances sent by Pakistanis working and living abroad.

“Almost half of the $20 billion remittances go into real estate every year. Why would any overseas Pakistani want to invest in property here if they have to register themselves as a taxpayer and create problems for themselves? After ruining exports, this government is now after remittances. Next year you will see a substantial decrease in the amount of remittances sent back home.”

Published in Dawn, The Business and Finance Weekly, May 7th, 2018