Lahore Real Estate Forum: Property News & Community Talk : ,

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CHANGES TO REAL ESTATE TAX LAWS: GOOD MOTIVE BUT TERRIBLE PLANNING

Government making a mistake by painting the entire real estate industry as a villain. Must take measures to prevent irrevocable loss to Pakistan’s economy.

KARACHI (23rd September, 2016) - Representatives of Pakistan Real Estate Industry Forum (PREIF) held a meeting to discuss the current state of turmoil created after the recent amendments to the Income Tax Ordinance 2001.

The attendees made some key observations about the real estate industry of Pakistan and the poor government planning that is evident from the manner the recent finance bill and subsequent ordinance was promulgated.

Members of the forum also proposed practical steps to move towards improving the situation.

FACTS:
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1. Real estate sector has over 50 associated industries which are impacted due the uncertainty created by the recent finance bill. Most noticeably, this includes industries such as Cement, Steel, Wires & Cable, and others which employ a massive workforce across Pakistan. It is feared that this recent bill will eventually lead to a massive number of jobs lost impacting common man in Pakistan.

2. According to a careful estimate, over 7 billion dollars’ worth of investment was being made every year by overseas Pakistanis in the real estate sector prior to this confidence shattering-measure by the government. This trend has seen a sharp decline after the bill causing a loss of billions of dollars to Pakistan.

3. While the stated objective of the infamous finance bill was to collect additional tax revenues, the exact opposite has happened causing loss to federal and provincial exchequers.

4. The recent finance ordinance has shattered the confidence of the real estate sector in a manner similar to the 1998 Nawaz Sharif government action when foreign currency accounts were frozen. It takes decades to rebuild confidence.

OPPORTUNITY
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1. The undocumented economy of Pakistan is painted as a scary villain by the government whereas it remains a fact that this economy exists due to government’s own failures, over the past several decades, to provide a clear roadmap and policy to transition this valuable sector of economy into the mainstream. This includes a significant number of small businesses and cottage industry. Trying to make this change overnight might lead to panic and a deep economic depression. It is also important to note that this segment of economy has also played its part in providing resilience to the overall economy of Pakistan in times of worldwide economic crisis like that in 2008. The government should leverage this powerful segment and bring this into mainstream gradually.

2. In the recently changing global geopolitical situation, overseas Pakistanis feel increasingly insecure and have a strong desire to make safe investments of their hard-earned money back in their homeland. In the absence of a business-friendly environment and infrastructure in Pakistan, real estate sector has provided a safe option to them for several decades. After the recent and sudden changes to the tax rules, Pakistan is quickly losing this opportunity to attract massive amounts of foreign remittances which have been finding their way to other avenues like UAE.

3. With Pakistan joining OECD, there’s opportunity to attract billions of dollars’ worth of investment by opening up real estate as a viable and attractive option. This can have far-reaching positive impact on Pakistan’s economy. It is far better compared to leaving those dollars in overseas banks.

SOLUTION
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To bring the real estate sector back on track, and to restore the confidence of overseas and resident Pakistanis, the government should announce steps similar to those announced for the stock exchange back in 2012 when capital gain tax (CGT) was introduced for the first time. Prior to the year 2012, there was money made by investors during the previous 36 years but they had not declared it because there were not required to do so under the prevailing law before 2012. So if the investors put that money back in the stock exchange, FBR was instructed not to ask the investors about the source of that income. This step had revived the market and also helped government with tax collection and provided a channel to gradually document 36 years’ worth of undocumented stock exchange economy. The benefits for Pakistan is evident in the form of a much more vibrant and powerful stock exchange today. The real estate industry of Pakistan is in a very similar position and requires similar steps.

The attendees showed grave concerns about the current state of the industry and decided to meet regularly to pursue the matter with relevant government officials as well as highlighting it in print and electronic media.