BUDGET 2019-20 PAKISTAN PROPERTY TAX AMENDMENTS | How Budget 2019-20 will impact Pakistan Real Estate Sector:
On Tuesday 12 June 2019, the PTI Government presented its first historic budget. Taxes were increased for many sectors whereas others got relief. There are mixed opinions about the budget. But for Pakistan Real Estate Sector the Pakistan Budget 2019-20 is not less than a shock. This is because the budget appeared more friendly for genuine buyers than the sellers, investors or realtors. The government planned the budget will a vision to collect higher taxes from property sector where most black money is parked. Lets discuss “How Budget 2019-20 will impact Pakistan Real Estate Sector”.
PAKISTAN TAX AMENDMENTS ANNOUNCED IN BUDGET 2019-20:
Non-filers have been allowed to buy property worth 5 Million PKR or more but;
A- Non-filer has to file returns within 45 days of the purchase of property.
B- Otherwise, within half an hour after the lapse of 45-day period, an automatic assessment will take place asking the purchaser to disclose the source of income.
C- In addition to that non-filer has to pay 5% amount of property price as penalty as per FBR Rate.
Purchase of Property Worth 5 Million PKR or More;
A- Anyone who buys property worth 5 Million PKR or More has to prove the source of income.
B- Anyone who buys property worth 5 Million PKR or More has to pay through Banks.
Capital Gain Tax for Empty Plots (CGT);
A- 100% profit amount/gain to be taxed if plot is sold within 1 year of purchase.
B- 75% profit amount or gain will be taxed if plot is sold within 10 years of purchase.
C- No taxes on profits if plots are sold after 10 years of purchase.
Capital Gain Tax for Constructed Property (CGT);
A- 100% profit amount to be taxed if constructed property is sold within 1 year of purchase.
B- 75% profit amount will be taxed if constructed property is sold within 5 years of purchase.
C- No taxes on profits if constructed property is sold after 5 years of purchase.
Formula to Calculate Capital Gain Tax (CGT);
Capital Gain or Profit will be treated as income and will be subject to normal income tax.
Withholding Tax (WHT);
A- Withholding Tax is decreased from 2% to 1% for filers. WHT will be collected as per FBR Property Valuation Rate.
B- Earlier there was no WHT on purchase of property if price was less than 4 Million PKR. But now WHT will be collected on all transactions.
C- Earlier there was no WHT if property was sold after three years of purchase. Now WHT will be collected up to 5 years. But if selling property after 5 years of purchase then no WHT.
FBR Property Valuation Rates;
FBR Property Valuation Rates will rise up to 85% market value.
HOW BUDGET 2019-20 WILL IMPACT PAKISTAN REAL ESTATE MARKET:
Realtors or Estate Agents are totally disappointed by the property tax amendments in the current budget. This is because realtors were expecting a relief for the property sector. Dealers wanted a decrease in FBR Rate and permission to buy property for non-filers. Yesterday many dealers told me that they haven’t paid rents and are planning the leave the businesses. Now more estate agents will close their agencies.
In Pakistan real estate sector is not only famous to park the illegal money but also to earn quick bucks. But property tax amendments have been planned to tax the realty sector. Now investors have lost the charm as they have to hold the property for many years to avoid taxes. This has made realty sector less lucrative for investors. Therefore speculation will decrease.
Sellers are in bad condition now. Sellers have three concerns. Firstly, it is very difficult to find filer buyers. Secondly, they have to wait for years to sell properties otherwise they have to pay higher taxes. Thirdly, as real estate sector is less lucrative for investors so it will be hard for sellers to buy buyers. In other words properties will take more time before changing hands.
Genuine Buyers with white money are the real winners of budget. Firstly, they will pay less taxes on the purchase of immovable properties. Secondly, due to more properties in the market than buyers, genuine buyers have more options to select from. Thirdly, genuine buyers will purchase properties at big discounts as new property tax amendments are enough to reduce the prices.
Future Price Trends;
Property Prices in Pakistan peaked in 2016. Since then prices are in constant decline. Property prices are already 35-40% down from peak of 2016. The new property tax amendments will reduce the volume of investment in real estate sector so prices will keep decreasing. It is expected that prices will decrease by 35-40% from current level. This is normal in a crashing market as Dubai property prices are already 75% down from peak of 2008.