November 07, 2006	Tuesday	Shawwal 14, 1427

ISLAMABAD, Nov 6: The Securities and Exchange Commission of Pakistan (SECP) and Finance Ministry have decided to set up a joint task force for removing hurdles in the way of establishment and growth of Real Estate Investment Trusts (REITs).

The task force would be announced later this week or earlier next week, official sources told Dawn here on Monday.

The SECP has announced the second draft of REIT Rules on Friday last after amending the first draft on the directives of the law ministry. The Finance Ministry had sent the draft to Law Ministry for approval in December last year. However, the bureaucratic red tape in both the ministries took almost one year to ask the SECP to redraft the rules.

REIT is a security that sells like a stock. It invests in real estate, directly or indirectly. REITs are registered by the Securities and Exchange Commissions across the world. They allow indirect investment in real estate by small investors who otherwise cannot afford investment in real estate on individually.

The SECP has offered its own recommendations to the Finance Ministry for removal of impediments at the federal and provincial levels for creating a favourable environment for REITs in the country, the sources added.

The commission has suggested that the stamp duties and registration fee on real estate transactions should be reduced to an aggregate value of one per cent to improve documentation and pricing transparency.

At present, these duties and fees are different in different parts of the country and could create hurdles in the way of the smooth implementation of the proposed rules for REITs.

Internationally REITs are entirely driven by specifically tailored fiscal incentives particularly taxation. The commission wants the same kind of incentives for REITs in Pakistan at federal and provincial levels that includes a considerable reduction in the cost of the transaction of real estates and ensuring maximum transparency in such dealings and taxation incentives for all stakeholders especially the investors, sponsors and real estate participants.

Official sources said that the SECP had also recommended elimination of the present exorbitant commercialisation fees altogether or bringing it down to one per cent of the total value of the land, which is being transacted.

The country’s supreme corporate regulator has also suggested that tax on rented property be reduced from the exiting 25 per cent to 5 per cent. Besides, tax on self-occupied property be rationalised and be adequately lowered than that on rented property. This recommendation is already a part of the National Housing Policy 2001.

However, the commission has also proposed a new type of tax on idle land (land non-utilisation fee) that should be charged on land acquired for development of a scheme but is not being developed within certain time frame. Through this tax, the commission intends to discourage speculation on Benaami holding of property.

The tenancy laws are excessively biased in favour of tenants amid wide spread abuse and allegations of corruption. The SECP has proposed that the tenancy laws (i.e. rent control laws) should be abrogated to encourage development of residential properties for rental purposes. The increase in supply of properties will result in more equitable and competitive rentals in the future.

There is also the lack of clarity in the Income Tax Ordinance regarding taxation on gains arising from the real estate transactions for corporate sector and individuals. Gains arising on the sale and purchase of the real estate made by REITs should be exempted from taxation for the next 10 years, the SECP has proposed.

The government has already provided tax exemption to capital gains for a decade.

Experts at the SECP are of the view that real estate for residential purposes should not be subject to any withholding tax, while real estate for other than residential purposes could be taxed at a reduced rate of 2.5 per cent and not the current rate of 5 per cent.

The income of REITs should be exempted from taxation subject to the condition that the minimum distribution by a REIT to its unit holders out of its net income shall not be less than 90 per cent.

The government has already been giving the same treatment to other collective investments such as mutual funds and modarabas.

The commission has also suggested elimination of 10 per cent withholding tax on REITs’ dividends.

The SECP has also recommended that the rate of withholding tax charged on housing and construction companies should be reduced to one per cent of the annual gross receipts of such companies to encourage activity in the construction sector and increase supply of real estate.

To ensure pricing transparency, the SECP has suggested that sellers of property to and the buyers of property from REITs should not be asked to show the source of money.