ISLAMABAD: At a time when the Federal Board of Revenue (FBR) is facing a shortfall of over Rs100 billion in revenue collection, President Mamnoon Hussain has given assent to the Income Tax Amendment Act 2016 to grant legal cover to an amnesty scheme that will allow property owners to whiten money parked in the real estate sector on payment of three per cent tax.

The president signed the act, which was passed by the National Assembly on November 30, on Tuesday despite opposition from certain quarters.

It is the third such scheme to be promulgated by the Pakistan Muslim League-Nawaz government since 2013. The current PML-N government is the first one in the country which has sought to regulate the real estate sector. However, it has launched the new amnesty scheme after largely failing to regulate the sector following tough opposition from various quarters.

Investors with black money parked in real estate sector likely to benefit; FBR expects to collect up to Rs50 billion under the scheme

The scheme will be available for an unspecified period as no cut-off date has been mentioned in the act. It will be applicable to properties purchased before July 1 this year.

Under the scheme, people whitening the black money invested in the real estate sector will not be asked to mention their source of income.

A tax official said the scheme would continue at least until June 2017, when proposals for the next year’s budget would come under discussion. “It will be considered in the next budget whether to continue the scheme or not,” the official said.

The FBR is expecting to collect between Rs40bn and Rs50bn under the scheme.

Tax will be paid on the difference between the revised FBR valuation rate and the district commissioners’ (DC) rate under the scheme. However, both rates are unrepresentative of the actual values of the properties and the scheme will exclude around 90pc of the actual value from the tax net.

The normal tax rate can be as high as 35pc. On top of that an equal amount of tax can be levied on such transactions in the form of penalties.

According to an FBR estimate, around Rs4,000bn is parked in the property sector each year.

Initially, it was agreed that the amnesty scheme would be offered on the actual declared transaction value, but this proposal met stiff opposition from the realty sector.

Section 111 of the Income Tax Ordinance 2001 can be invoked to deal with undisclosed or concealed money if the buyers cannot substantiate their sources of income. However, this section was changed through an amended ordinance to exempt the property tycoons from the actual levy and allowed them to whiten their property.

A tax expert said the scheme would only benefit a few people who had parked black money in the real estate market.

In the budget for 2016-17, the taxable period for capital gains tax on disposal of immovable property was extended to three years and a flat 10pc tax was made applicable on the seller of the immovable property if s(he) disposed of it within one year of its purchase, 7.5pc if it was disposed of within two years and 5pc if it was sold within three years. There will be no capital gains tax after three years.

As a result, the new property tables, which came into effect on July 31, will be used for calculating 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 was notified by the district collector under Section 27-A of the Stamp Act, 1899.

Published in Dawn, December 7th, 2016