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Land & corruption: FBR’s move on real estate

August 30, 2013

IN announcing its intention to try and bring real estate investors into the tax net, the Federal Board of Revenue has drawn attention to a crucial sector, even if the intended move itself amounts to very little, given the complexities involved. There is no doubt that the government needs to drastically increase tax yields, and while there are several sectors that see the movement of vast sums of money, the state accrues barely any benefit at all. Curiously, though, actually taxing real estate transactions does not seem to be on the state’s agenda. As he spoke to the media on Wednesday, FBR chairman Tariq Bajwa’s chief concern appeared to be to find a way to track the remittances sent here by overseas Pakistanis, which mostly end up in real estate. To this end, he said, the army-run Defence Housing Authorities and the private Bahria Town development projects had been asked to collect data. The goal, he reiterated, was not to tax transactions but to identify people who should, but do not, exist on the tax rolls.

Given the way the real estate business has developed, and the massive real-estate speculation market that has emerged in urban areas, activity in this sector ought to be swelling the coffers of the state just as it does those of private parties. Flowing from this, the sector has over the years ended up with so many loopholes, inefficiencies and disparities that corrupt, illegal practices have effectively been built into the system. Consider, from many examples, the vast sums of money the state loses because in several, if not most, urban areas, the price of a piece of property on paper is far lower than it is on the market. Or the fact that rapid urbanisation and the unquenchable thirst for property means that great tracts of agricultural land are absorbed by cities. Unless the state can ensure that rezoning occurs in every single instance, this means that land can be bought at agricultural rates and sold at urban prices.

The problems with regulating and thus earning from the real estate sector are systemic, deeply entrenched and far too many to recount here. A holistic process of reform and regulation, followed by equitable taxation has to be worked out from the bottom up. But there is significant resistance from well-known individuals and groups with vested interests. Unless the latter problem is overcome, and some blue-sky thinking applied, piecemeal moves such as the FBR’s demand for data are unlikely to yield any meaningful benefits.