KARACHI/ISLAMABAD: While the Federal Board of Revenue (FBR) on Monday agreed to form a committee to determine a mechanism for fair valuation of property for the purpose of taxation, the uncertain situation has hit the real estate market in Karachi with investors being reluctant to strike new deals.

The real estate market had witnessed an extraordinary growth after the Rangers-led targeted operation against militants, criminals and hitmen associated with political parties, but property prices stalled after a recent tax regulation that allows the State Bank of Pakistan (SBP) — instead of provincial governments — to evaluate all properties through its valuers.

The relevant amendment made to Section 68 of the Income Tax Ordinance, 2001 through the Finance Act, 2016 has been effective since July 1, 2016.

Though market punters say there is no immediate impact on property prices after the federal budget 2016-17 was passed and the amendment made to the Income Tax Ordinance, 2001, both builders and dealers believe if the government does not change its position on the issue a major slump in property prices is feared.

The uncertain situation at present has discouraged further investment from overseas Pakistanis who are waiting for a government response to the protest lodged by the real estate stakeholders.

In the budget 2016-17, the taxable period for capital gains on disposal of immovable property was extended up to five years. And, a flat 10 per cent tax was made applicable on the seller of the immovable property if he sells it within five years of purchase. But through an amendment to section 68 of the Income Tax Ordinance, 2001, the task of determining fair market price of property has been given to professional valuers approved by the SBP.

The SBP announced a 106-member approved panel of the property valuers. Nineteen of them have been permitted to determine the fair market price of a property of unlimited amount, 59 for a property worth up to Rs1.5 billion and 28 others for a property worth no more than Rs500 million.

Buying a high-priced property and paying 10pc capital gains tax on it if it is sold before five years means a lot more additional payment in real terms. This has lessened the incentive for investment hoppers, tax-evaders and money launders to a great extent.

That is why property prices are coming down not only in upscale areas like Defence housing schemes and Clifton but also in middle-income group neighborhoods such as Gulshan-i-lqbal, Gulistan-i-Jauhar and North Nazimabad, realtors say.

The amendment attracted strong reaction from the industry and the protest of the stakeholders seems to have been heard in the power corridors, as officials of the Federal Board of Revenue met them on Monday and formed a body to determine a mechanism for fair market value of property.

“We received more than 60 people at FBR in today’s [Monday] meeting,” said the FBR spokesperson while talking to Dawn.

“The meeting admitted undervaluation of property for taxation purposes in Pakistan. The first meeting of the committee is expected to be convened on July 20. The committee will come up with recommendations, which will be sent to the finance minister for approval,” he added.

Till the committee and the relevant authorities make future of the new tax regulation clear, the real estate market in the country’s business capital as well as other cities does not look very promising.

Defence and Clifton Association of Real Estate Agents, better known as DefClarea, claims “no movement” after the budget, as the market that normally witnesses bullish trend after Eid-ul-Fitr shows no sign of improvement.

“The government claims that Rs5,000 billion of undocumented economy has been invested over the years,” said the DefClarea spokesman. “If this is true then the government should announce an amnesty scheme under one or two per cent to make that money white. In the sectors other than property, 60 per cent investment comes through undocumented economy. The regulation announced by the government is not a solution to the problem rather it multiplies the problem.”

Seasoned real estate dealers and brokerage call the recent business situation in Karachi “the worst” in decades, as the buyers and sellers both had asked not to move further until the situation turned “investor friendly”.

“We make deals on behalf of our clients or investors [buyers or sellers],” said a real estate dealer, Maaz Liaquat. “We have been asked to stop making further deals until the situation changes. If the situation doesn’t change and the government sticks to the tax regulation, they will not invest and ultimately it will hit the market badly. There is no immediate impact on property prices right now but if the tax remains there, it will go drastically down.”

Published in Dawn, July 19th, 2016