ACCORDING to reports in the local media, along with the higher taxes imposed on real estate in the recent budget, the Federal Board of Revenue also intends to revise its property valuation rates, used to calculate tax on property transactions, to 90pc of the market value. If the same is achieved — tax officials have reportedly told a Senate panel that they intend to issue a notification to this effect next month — it will constitute an important step towards fairer taxation of the real estate sector, which has for long been a haven for tax evasion and money laundering. The current property valuation system in vogue in Pakistan is inefficient and opaque, with at least three different valuations existing for any given property. This includes the FBR valuation mentioned above, which is used to calculate federal taxes; a District Collector, or DC valuation, which is used to determine provincial taxes; and the actual market price, around which the property changes hands between the buyer and seller. The large variations between the three rates allow buyers and sellers to easily get away with paying less tax than they should be liable for.

At a time when the country faces severe resource constraints, the real estate sector cannot be allowed to operate like it has been. The official rates grossly undervalue properties and deprive the state of much-needed revenue. They also allow all manner of unscrupulous elements to thrive. On paper, properties change hands at a fraction of their worth, and the difference between official and market rates is invariably settled in cash. This means money keeps circulating away from the tax authorities’ view, which makes it much more difficult for them to extract revenue through fair, progressive taxation. The pricing distortions also allow black money to be whitened easily, as the disparity between declared and market rates can be exploited to launder large volumes of unlawfully acquired wealth relatively quickly and easily. There is no question that harmonising property valuations and digitising property ownership and transaction records is the way to go: the question is, does the current government have the resolve to implement and enforce these measures, considering the power and influence of the various players involved in the real estate market? Others have tried and failed. It remains to be seen what this government may achieve.

Published in Dawn, June 24th, 2024