KARACHI: What began as a massive effort to take on the property mafia has ended with a whimper. The ordinance issued on Monday gives the FBR power to determine fair market values of property prices across the country and update its information every year. But the fair market values that the FBR will be relying on are provided by real estate stakeholders and builders, not by an independent panel of valuators selected by the State Bank, as originally stated in the Finance Act.

Aqeel Karim Dhedhi, also known as AKD and widely considered to be an important player in the country’s real estate and property development sector, claims that with the new property tables the declared value of a 500 sq yards plot in DHA Phase 8, Karachi, will become Rs10 million. It used to be Rs1.5m under the old system.

The new system will undoubtedly generate more revenue for the government, through stamp duties and the Capital Gains Tax (CGT), but the stated intention behind the measure — to tackle the property market as a favoured destination for black money — has been defeated with the compromise. With the new valuation tables announced by the FBR and the elimination of the role of independent valuators, the government has won little more than a sliver in additional revenue.

Property developers argue there are good reasons to not resort to independent valuators though. “We told the government that whenever outside valuators have been used, it has opened the door to corruption,” AKD says, mentioning some high-profile corruption investigations over the past few years in which misdeclaration of property values played a key role. In all of them, he adds, it was the judgement of outside valuators that was instrumental in creating a scam.

Members of the Association of Builders and Developers (ABAD), who were involved in negotiating the new property valuation tables with the government, tell Dawn that with the new figures the declared prices of property “have now been brought to 20 to 25 per cent of their market value”. A brief survey of prices of residential properties conducted by Dawn confirmed this ratio.

It is still not clear how exactly the government has drawn up its valuation tables. “They called for property values from various brokers around the country,” says AKD, “then checked the values themselves.” When pressed for the procedure applied to verify the figures, he would simply say “the government got itself entangled in a mess when it picked this battle, and just wanted to extricate itself”.

Property transfer fee

Members of ABAD object to government charges applied for property transfers which, according to them, are almost 13pc of the declared value. With the new rates for CGT applicable to property transfers, these charges could come to almost 25pc of the declared value, they claim.

“Nowhere in the world are these charges as high as in Pakistan,” says Muhammad Hasan Bakhshi, ex-chairman of ABAD’s southern region, covering Sindh and Balochistan. “Such high charges cause people to start dealing through a power of attorney and give an incentive to significantly under-declare the actual price.”

In some areas the prices indicated in the new tables could be as much as 40pc of the market price, he says, but in majority of the cases the declared value will be 20-25pc of the actual price.

AKD, however, claims that there is gross variation, and goes so far as to say that in some cases prices in the new valuation tables may even be higher than the market price, giving some examples from land along the Superhighway in Karachi.

Nevertheless, it is clear that

even with the new valuation tables, the government will continue to lose significant amount of revenue due to misdeclaration of property prices and fail in tackling the flood of tax-evaded wealth that flows into in the real estate sector.

Black money

The new system actually sanctions the use of black money in property dealings in return for a small CGT on each transfer undertaken within 3 years of acquiring the property.

The system of under-declaring property prices has been in place for 65 years and cannot be fixed in one go, argues Bakhshi. “If you want that the declared value should be the same as the fair market value, you need at least one year of work before you can get there,” he says.

Property transfers largely halted across the country while the negotiations carried on. A high-level banker in charge of consumer loans, including for home building and purchase, who did not wish to speak for attribution, says banks will take all of the forthcoming week “to understand the various scenarios” created by the new valuation tables that will be used to calculate tax liability in property transfer cases before adjusting their offerings.

“Obviously this means people will change their loan and equity proportions accordingly, and we will have to adjust our offerings. We will have to see what sort of stamp duty and taxation treatment transactions will get under the system, that is unclear at this point.”

But ABAD representatives say it could take the market between 3 and 6 months to understand the implications of the new valuation tables, during which time they expect some amount of uncertainty to prevail.

“Surely this is going to dampen work in this sector,” Bakhshi says, adding “and I think this is what the government wanted as well”.

Additional reporting of property data by Aamir Shafaat Khan in Karachi, Kashif Abbassi in Islamabad and Khalid Hasnain in Lahore.

Published in Dawn, August 4th, 2016