KARACHI, 16 September 2016: Pakistanis living overseas are a key contributor to the real estate economy in the country but are recent tax changes discouraging these invaluable investors?
After four years of acting like a bull, the real estate market in Pakistan appears to be cooling down, according to analysts at Lamudi.pk. Industry experts point to the amendments to Section 68 of the Income Tax Ordinance 2001 that became effective in July as holding part of the responsibility for the swing in the market.
Certainly, overseas investors have been bitten and the deep running consequences of this are multifaceted. There is now in effect a discrepancy in the withholding tax policy—a tax deducted at source, especially one levied by some countries on interest or dividends paid to a person residing outside of that country. The rate of this tax has doubled from two to four percent on property purchased by non-filers simply because they are non-resident.
Reeling from the tax increases, overseas Pakistanis may very well look elsewhere for their next investment. Dubai is one such place that may benefit from these new tax laws. Since the imposition of the new withholding tax on banking transactions, Dubai has seen a steady increase in real estate investment—20 billion dirhams in 2015.The real estate market in Pakistan relies heavily on money received from Pakistani investors living outside of the country but recently this flow of capital has decelerated.
“It does seem strange that overseas Pakistanis are on one hand exempt from filing an income tax return but have to pay withholding tax at the time of purchasing a property in Pakistan”, said Saad Arshed, managing director of Lamudi Pakistan. “Since the amendment, we have noticed a drop in online property searches from outside of Pakistan,” Arshed added.
Given the palpable correlation between the value of overseas investment and the health of the real estate sector in Pakistan, the government might need to investigate the tax regime in further detail. Buyers are being hit from all angles with capital gains tax increased to 10 percent, advanced taxes have risen to four percent and stamp duty up 50 percent.
However, on the plus side, the exchequer will see a much higher take from the vast real estate sector and this money can be used to enhance vital infrastructure and support the construction of affordable housing, an issue which Pakistan desperately needs to address.
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Launched in 2013, Lamudi is a global property portal focusing exclusively on emerging markets. The fast-growing platform is currently available in 13 countries in Asia, the Middle East and Latin America, with close to a million real estate listings across its global network. The leading real estate marketplace offers sellers, buyers, landlords and renters
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Shahzeen Haris
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We personally believe that the real estate market of Pakistan is not ready to understand the recent and stark changes made in the Finance Act 2016 let alone accept them. Implementation of these new amendments has left investors in a state of mayhem and its effects are felt wide and across in the form of a loud silence seen in terms of very low sale and purchase activity in investor-centric areas of Karachi.
Pakistan real estate sector has always been promising and is blossoming with the potential offered by new investment options while older societies still generate high returns. However, the newly imposed tax situation has caused a slight slowdown in the property sector.
The newly imposed tax system has caused slight confusion amongst investors. It has caused a minor deterioration in investment activity as most investors have adopted a wait-and-see policy. Once investors are absolutely sure about the effect of taxes on their investment, activity may pick up.
In BTK, the taxes are paid according to plot sizes. Though the amendments made in property taxes have confused investors, sale-purchase activity is still going on, meaning that people are still investing in BTK irrespective of the newly imposed taxes.
The government needs to realize that the implementation of fair market valuation criteria and a sudden and sharp rise in Capital Gain Tax is not something the market can accept and deal with right away. The procedure has to be gradual and be implemented in phases spanning at least 3 years.
W are not surprised to see that genuine buyers don’t have many concerns over these taxes as many of them are either first time buyers or those with long term investment plans. It also seems alright to assume that they perhaps find the details a little too confusing to comprehend and are thus waiting for the matter to settle.
Investors, on the other hand, have serious concerns and they aren’t willing to make a move unless the matter settles in a manner less troublesome for them. The agents operating in investor-focused areas have major reservations about the new reforms as they have already started to deal with a standstill in property sale and purchase activity.
In case the taxes are implemented, buyers and investors will be more inclined to invest in projects where possession handover is still pending. In case of Karachi, Bahria Town and all other projects awaiting possession can benefit greatly from the present tax chaos. Many investors and agents have already taken note of it and it is very likely that investors’ focus will soon be shifted from DHA to Bahria Town Karachi.
INAMULLAH ANSARI
Director-Pakistan KFF-Australia.
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