Next budget may bring real estate into tax net

ISLAMABAD: The government`s financial plans for the next budget are still being given final shape and they include a step to bring real estate into the tax net.

It aims to introduce heavy penalties for those found guilty of evasion as well as more drastic measures such as purchases by the government in case property prices are deflated for documentation at the time of sale-purchase deals.

A senior official told Dawn on Thursday that the Federal Board of Revenue was engaged in an internal exercise aimed at increasing the tax revenue from property deals by linking the tax to the value of the property. This will be a change from the existing practice of registration of property deals at nominal rates.

“It will be a well-designed package that will be part of next year`s budget proposals,” he said, adding that collecting taxes linked to the real value of property was a mammoth challenge but the government was determined to start the process next year.

The official said that as tax on real estate was a provincial subject, the provinces had been asked to bring this sector into the effective tax net as promised under the 7th National Finance Commission Award. However, he pointed out that the federal government could also collect revenue from this sector through the federal excise duty.

“We are also studying the relevant laws in India and some other countries where the government agencies are allowed to purchase properties at 5-10 per cent more than the price registered by the two parties in an undervalued deal or offer for auction such properties to collect more money,” he said.

The official said the exact contours of the package were still to be determined but the aim of the government was to penalise those who declared the property value less than the market prices and earn more revenues for the exchequer.

Another possible penalty would be to make the seller and the buyer pay much higher taxes if they under-declared the value of the property. In some countries, the seller and buyer have to pay up to 200 per cent of the difference between the real value of property and the declared sale price. “We are working on similar lines,” the official said.

He said that currently buyers and sellers declared a lower property value and purchase price as this enabled them to pay nominal taxes for the transaction. “We are going to make this benefit into a significant future risk.”

The official explained that not only private citizens but also government agencies — Islamabad`s Capital Development Authority, Defence Housing Authority (DHA), Cantonment Boards, Lahore Development Authority (LDA) and similar agencies in Karachi and other cities — were in one way or another involved in this trend of undervaluing properties.

This does not just encourage black money but also costs the government heavily which calculates excise duty at one-fifth of the actual price.

Sources said the major problems were being faced by those who had bought property from their hard-earned money as they too were forced to buy or sell at low prices to evade tax which meant that a chunk of their legal money evaporated.