ISLAMABAD: At a time when tax compliance has fallen to dismal levels, the government is considering yet another tax amnesty scheme that will allow property owners to whiten their money parked in the real estate sector.
The National Assembly’s Standing Committee on Finance has cleared the proposed scheme despite opposition from the tax department, and if approved by parliament, it will become the third such amnesty scheme promulgated by the Pakistan Muslim League-Nawaz government since 2013.
The tax department, which is visibly perturbed by the move, seems helpless to block it as the finance ministry has already green-lighted the scheme.
A source in the finance ministry told Dawn the ministry had agreed with realty stakeholders in principle to impose a special rate of three per cent for a period of two years.
As per the proposed scheme, the tax will be paid on the difference between the revised Federal Board of Revenue (FBR) valuation rate and the district commissioner (DC) rate. Both rates are not representative of actual transaction values and this scheme will exclude around 90pc of the actual value of the property from the tax net.
In case the tax amnesty is not promulgated, FBR can theoretically collect around Rs1,400 billion in taxes from the property transactions between individuals that take place in one year at the normal tax rate of 35pc. Over and above this, another Rs1,400bn can be levied on these transactions in the form of penalties.
But under the proposed scheme, the FBR will hardly get Rs120bn on the same transactions at the rate of 3pc. According to an FBR estimate, around Rs4,000bn is being parked in the property sector each year.
Initially, it was agreed that amnesty scheme would only be offered on the actual declared transaction value, but this proposal met stiff opposition from the realty sector, which was also supported by elements within the government. The scheme will only be applicable on properties purchased before July 1 this year.
Section 111 of the Income Tax Ordinance 2001 can be invoked to deal with undisclosed or concealed income if the buyers cannot substantiate their sources of income. As a result, the difference between the FBR valuation and the DC rate will be taxable at the normal rate (up to 35pc) along with any penalties that may be imposed.
A tax official said that a substantial portion of property transactions was made with undeclared money.
A tax expert said the proposed scheme would only help a few people who had parked ‘black money’ in the real estate market. Much like remittances, the expert said, the government was providing yet another avenue to people to invest their money in real estate and whiten it by only paying 3pc tax.
To implement the proposed amnesty scheme, government is amending Section 111 of the Income Tax Ordinance.
In the budget for 2016-17, the taxable period for capital gains tax on disposal of immovable property was extended up to three years and a flat 10pc tax has been made applicable on the seller of the immovable property if he disposes of it within one year of its purchase, 7.5pc if it is disposed of within two years and 5pc if it is sold within three years. There will be no capital gains tax after three years.
But through an amendment to Section 68 of the Income Tax Ordinance, 2001, the task of determining the fair market price of property has been given to the FBR.
As a result, the new property tables, which came into effect on July 31, 2016, will be used for the calculation of federal taxes — capital gains tax, withholding tax and section 111 of the Income Tax Ordinance 2001. It was also agreed with realty stakeholders that the rates would be brought closer to the actual market value within the next three years.
Internationally, tax is charged on transaction value, but in Pakistan the collector value is much lower than the actual transaction value. In the provinces, the valuation table is notified by the district collector under Section 27-A of the Stamp Act, 1899.
Published in Dawn, November 29th, 2016