The pro-people finance bill appears to have been less favorable to Pakistan’s real estate sector. The sector protests against the recent modification of the capital gains tax regime, induced by the new finance law 2021-22 passed on the 11the June. The concerned amendments according to the demonstrators are the amendments to articles 37 and 203 of the bill.
Article 37 of the bill reads: “Provided that when the taxable gain on the disposal of the immovable property exceeds five million rupees, it is taxable under subsection (1) of this section and the provisions of subsection section (3) do not apply. However, the taxable capital gain is calculated taking into account the benefit of the holding period provided for in paragraph (3A).
The explanation of the act added: “To remove the doubt, it is clarified that when a person is habitually engaged in transactions of sale and purchase of real estate or that such sale and purchase is an adventure of the nature of trade and business, the provisions of this paragraph do not apply and the income from these operations is attributable to the heading Business income.
Likewise, section 203a reads: “An officer of the Inland Revenue having the rank of Assistant Commissioner of Inland Revenue or any other officer of equal rank authorized by the Council for that purpose, who, on the basis of material evidence, has reason to believe that 83 any person having committed an offense of concealment of income or any offense justifying prosecution under this Ordinance, may result in the arrest of that person.
Secretary General of the Association of Real Estate Consultants (RECA) Mr.. Ahsan Malik has appeared on numerous national television shows to talk about this change in capital gains tax, which may discourage the growth of Pakistan’s real estate sector, which has gained momentum in recent months.
The real estate industry has been running ads in the past 24-48 hours on various national newspapers like Jang, Tribune to raise awareness of the issue and call on the government to make regulatory changes.
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The announcement calls for the establishment of a Real Estate Regulatory Authority (RERA) in Pakistan to address these issues. RECA also wrote to the Standing Senate Committee on Finance and Revenue.
Mr. Malik has said on various platforms that the real estate sector is the main growth engine of the Pakistani economy. This is in line with the Prime Minister’s own views, where he has repeatedly emphasized this fact, and this can be seen from the fact that the construction industry was the first to reopen on the instructions of Prime Minister Khan after the lockdown from 2020.
It should be mentioned that various economic experts believe that the housing industry is behind the unexpected growth of Pakistani economy to 4 percent of GDP in the outgoing fiscal year. This upward momentum has made it possible to invest in the sector, increasing investor confidence in the Pakistani economy.
The real estate or construction sector of the economy is not an isolated sector, but more than fifty different industries are said to be directly or indirectly related to the sector. This is clearly evident from the fact that the cement industry, brick industry, steel sales and other related sectors experienced geometric growth in fiscal year 2020-2021.
This can have an additional impact on sectors revolving around informal work, giving jobs to plumbers, electricians, carpenters, among others, and results in increased sales of products related to the industry like electrical gadgets, carpentry. .
The skilled workforce like architects, civil engineers, designers is also linked to industry, providing jobs for the people.
For this very reason, the current government had pushed the sector in 2020, and sales of cement and steel increased by 70%.
The real estate industry is questioning whether this is myopia on the part of ‘babus’ in the RBF, or whether it is a conspiracy against Prime Minister Imran Khan’s plans to elevate the housing sector in Pakistan.
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Indeed, such an amendment proposed in the finance bill is contrary to the speeches and objectives set out by the Prime Minister over the past three years. Even the new finance minister Shaukat Tarin has said on all platforms that the plan for the next fiscal year is to stimulate growth.
In his budget speech to parliament, Pakistan’s finance minister said the stabilization period was over for Pakistan and government policies would now focus on “sustainable growth” of the economy.
This is further proven by the fact that the Minister of Finance is reluctant to approach the IMF again, as the OIG’s structural adjustment program restricts growth, and the review planned for the next tranche of the IMF loan. in Pakistan was brought forward two months from July. 2021.
So, in the face of this, the government seems to be aiming for a boosted growth of the economy, however, the mentioned amendments will only undermine the growth of Pakistan’s leading sector and deter much needed capital inflows.
There can be two logical reasons that lead to such an atrocious law. Either a short-sighted RBF ‘babu’ designed this tax to meet the revenue-raising target for the next fiscal year 2021-22, or it is an attempt to slow the growth of the real estate sector to lower inflation in the country or divert capital flows to another sector of the economy, such as manufacturing.
Several people wonder how such a proposal did not pass the otherwise very strict scrutiny of the standing committees examining the budget bill.
The impact of the bill
This will impact a lot of people as the construction industry grows and people use incentives and opportunities like newly approved mortgage facilities and foreclosure laws to build small homes for them- same.
If we only consider the Twin Cities, a large number of 5, 8 and 10 marla dwellings are under construction. Taking the example of Bahria Enclave Islamabad, just off the Kuri road, over the past 20 months, 2,100 homes have been built, and 700-800 more are under construction. The same goes for all major cities in Pakistan.
The current capital gains tax regime, which has spurred growth in this sector, imposes 2.5 percent tax on a gain of less than five million a year, charges 5 percent on the gain between five and ten million a year, imposes a 7.5 percent tax on a capital gain of more than 10 million, and more than 10 percent has earned a capital gain of Rs15 million in a year.
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As a result, cement has been among the top five performing sectors of the economy over the past year. According to the economic survey, “the cement industry recorded the fastest year-on-year growth of 44.6% in March for fiscal 2021 due to the massive increase in domestic consumption as well as exports. Total cement shipments amounted to 5.381 t compared to 3.719 t last year.
Domestic consumption increased 42% to 4.563 mt from 3.213 mt in March for fiscal 2020. The export trend represented substantial growth of 61.6 per cent to 0.818 mt of shipments in March FY2021 compared at 0.506 mt over the past year.
The proposed amendment to the capital gains tax states that any capital gain over Rs 5 million would be treated as part of a normal income tax and would be treated as the regular income of the person.
This means that any income over 6 million rupees per year would be taxed up to 35 percent. This will lead to the collapse of the industry and the inflow of capital in terms of investment via remittances, which are mainly invested in real estate, would be compromised.
This is very likely to hurt the growth of Pakistan, which relies mainly on the inflows of remittances, as has been the case for the outgoing year due to the introduction of Roshan digital accounts.
However, the government seems blissfully ignoring the ongoing crisis. This could be clearly seen by the oblivious Federal Minister of Economic Affairs, Mr. Omar Ayub, as he was asked about the issue on a television show on 92 news.
Oddly enough, the still-aware opposition also did not seem aware of the issue since they were asked about the issue on talk shows, and therefore no voices were raised by the opposition benches.
This ignorance can lead to the passing of such an important and hard-hitting thing by parliament and cause enormous damage to the real estate sector and, by extension, to the economy of Pakistan.
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