Real estate sector stuck in limbo as decision on tax incentives deferred

ISLAMABAD: Pakistan’s real estate sector continues to face uncertainty as Prime Minister Shehbaz Sharif has put on hold a decision on a tax incentive package aimed at reviving the sector.

The proposal, which includes reducing property transaction taxes and abolishing the federal excise duty, has been met with mixed reactions from stakeholders.

The housing sector task force, formed by the prime minister to address the sector’s slump, met on Friday and presented its recommendations to the premier. The team proposed that the federal excise duty, which has been disputed by taxpayers and is also being challenged in courts, be abolished.

 The Federal Board of Revenue (FBR) chairman, Rashid Langrial, backed this proposal, citing that the levy is ‘unjustified’ and has been a point of contention for many. However, the key issues of providing a subsidy to boost construction activities and an amnesty on disclosing the source of income remain undecided.

Arif Habib, a prominent businessman, suggested that first-time home buyers be given a one-time amnesty on an unexplained income of up to Rs50 million. This proposal, however, was opposed by Langrial, who pointed out that it would be tantamount to giving a tax amnesty, something that the International Monetary Fund (IMF) has consistently opposed.

The FBR chairman’s opposition is not surprising, given the IMF’s stance on tax amnesties. The IMF has long maintained that such measures would lead to a loss of revenue for the government and create an uneven playing field for compliant taxpayers.

Despite the opposition, the business community is determined to push for the proposal.

Arif Habib argued that his suggestion did not constitute a tax amnesty, as it would be limited to first-time genuine buyers, and would help to alleviate the burden on the real estate sector. He said the large informal cash-based economy in Pakistan was one of the main reasons for the sector’s stagnation, as many buyers opted for cash transactions to avoid scrutiny.

PM to approve critical housing sector initiatives, focusing on tax rationalisation

The prime minister has tasked Economic Affairs Minister Ahad Khan Cheema to refine the package and take the IMF on board. A meeting with the IMF is scheduled for next month, where the business community will push for the amnesty scheme to be discussed.

The real estate sector task force had been formed in response to the sector’s slow-down, which has been attributed to high taxes and overall sluggish economic growth. Pakistan’s economy grew at a meagre 0.9 percent rate in the first quarter of this fiscal year, further exacerbating the challenges faced by the sector.

The prime minister is keen to promote construction and economic activities in the country and has instructed government officials to work with Arif Habib to find a solution. The task force also discussed giving interest-rate subsidies to enable lower and middle-income groups to take bank loans for home construction. The Economic Affairs Minister has been asked to come up with recommendations on this front by next week.

The real estate sector in Pakistan is largely unregulated, with many housing societies operating without regulatory approvals, and vast agricultural lands being converted into housing societies. The sector is also plagued by overselling of apartments and plots, with many buyers opting for cash transactions to avoid scrutiny. The solution to this, according to some experts, lies in allowing construction projects to be funded through escrow accounts. Despite the challenges, the government has made some progress in the past. Former prime minister Imran Khan had implemented an interest-rate reduction subsidy for lower-middle-income groups, which helped many to purchase their own homes. The central bank has set the policy rate at 12 percent, but home loans are still expensive, ranging over 17 percent.