Pakistan’s real estate sector is an emerging industry. After a period of stagnation in 2017 due to introduction of various tax reforms, the real estate sector is showing signs of sustained growth over the years. In the aftermath of the coronavirus pandemic induced lockdowns, the incumbent government has also risen the construction sector to industry status. This has further boosted the real estate development sector with Pakistan experiencing record sales in cement and registration of real estate companies.
In Pakistan, many people still lack primary living facilities and this demonstrates that there is great need and room for real estate development and growth in the market. Real estate is a growing industry in Pakistan, and spending on construction is increasing exponentially over the past few years. Pakistan’s real estate sector grew by 118pc in the last five years and is one of the least transparent or regulated in the world (Rashid, 2019). The real estate sector has gradually evolved into an important source of economic growth in Pakistan. The combined direct contribution of construction and housing sector to the country’s GDP has been consistently higher than 9 percent over the past decade. A large number of vertically integrated sectors have also shown improvement such as cement, steel, wood, cables, ceramics, etc. But an administration fraught with nepotism and corruption, lengthy processing of applications, supply-chain disruptions, frivolous litigation cases, absence of incentives for investors, and tax collection are some of the challenges in the real estate world. Therefore, it is necessary to understand government reforms in the real estate sector.
Role and Significance of Government Policy
Public policies are enacted by governments in response to real-world problems faced by the people. These policies often reflect the interests of different stakeholders and are mapped accordingly in collaboration with industry experts. Public policy can be interpreted in terms of only ideas or can be a collection of empirical results based on actions being taken on ground. Policy aspects can range from regulation and subsidies to laws on the national or international level. The policy-making process starts with agenda setting, followed by formulation, legitimation, implementation, and at last, evaluation. The whole process helps in setting a direction for future government and private sector initiatives. Organisations, profit or non-profit, can keep into consideration the policy demands to better equip themselves to meet standards of business and help their growth strategy become more aligned with government objectives. A good public policy will have an inclusive representation of all the key stakeholders involved and not just the interests of a particularly influential group. This requires adequate communication throughout the policy-making process. Oversimplification of issues and failure to define the problem effectively is one of the main reasons for the failure of public policy. Therefore, public policies play a vital role in providing a long-term direction to different institutions for solving the problems of the common public. (Mackay, 2011)
Major Government Reforms to Regulate the Real Estate Sector
The Government of Pakistan has taken many steps to reform the real estate sector. The Finance Act of 2009 stipulated the mandatory filing of returns by persons owning immovable property with land area greater than or equal to 500 square yards and/or having flat with covered area of 2,000 square feet or more. The step was taken to increase the taxpayer net. Similarly in 2010, a FBR circular authorised the provinces to collect Capital Value Tax (CVT) on immovable property. It is a tax paid by the buyer at the time of purchasing property and is payable on the capital value of the acquired asset. In 2012, through the finance act 2012, capital gains tax (CGT) on sale of immovable properties, holding period of which remained less than 2 years. This meant that people who previously remained untaxed in the home construction business were now eligible for tax. This massively impacted the real estate sector and slowed down sale and purchase of newly built homes. But in the longer run, the strategy proved beneficial as the government tax collection increased due to the measure. The law was amended in 2014 and a 10 percent CGT was charged on sale of properties with holding periods of up to 1 year and 5 percent for those having a holding period of up to 2 years, while no CGT would be charged on properties with holding periods above 2 years.
Following this, the Finance Act of 2016 raised advance tax on the purchase of immovable property with value of greater than PKR 4 million to 2 percent for filers and 4 percent for non-filers. In case of sale, the tax rate was 1 percent of the gross amount of the consideration received for filers and 2 percent for non-filers. Although these reforms were aimed at increasing tax collection, they did not benefit the real estate sector. In 2018, an amnesty scheme for declaration of undisclosed assets was introduced but non filers were barred from purchasing property valued above Rs 5 million. All these reforms in the real estate sector have not positively impacted the sector in the long run. Since the sector is considered a tax haven for ill-gotten money, the government tries to increase tax revenue collection without realising the consequences of slowing down real estate development. (Delmendo, 2019)
Bibliography
Delmendo, L. C. (2019). Pakistan’s high inflation pushing up house prices. Retrieved from https://www.globalpropertyguide.com/Asia/Pakistan/Price-History
Mackay, M. (2011). Understanding and Applying Basic Public Policy Concepts. Retrieved from https://www.politicipublice.ro/uploads/understanding_public_policy.pdf
Rashid, A. (2019, March 23). Will PTI’s housing programme address the root causes of the housing crisis? Retrieved from Dawn: https://www.dawn.com/news/1439813
Research Questions
-
What is the potential of real estate in Pakistan?
-
Why does the real estate sector need reform?
-
What has been done to reform the real estate sector?
Key Takeaways
-
The Finance Act of 2009 stipulated the mandatory filing of returns by persons owning immovable property with land area greater than or equal to 500 square yards and/or having flat with covered area of 2,000 square feet or more.
-
In 2010, a FBR circular authorised the provinces to collect Capital Value Tax (CVT) on immovable property.
-
In 2012, through the finance act 2012, capital gains tax (CGT) on sale of immovable properties, holding period of which remained less than 2 years.
-
In 2014 and a 10 percent CGT was charged on sale of properties with holding periods of up to 1 year and 5 percent for those having a holding period of up to 2 years, while no CGT would be charged on properties with holding periods above 2 years.
-
The Finance Act of 2016 raised advance tax on the purchase of immovable property with value of greater than PKR 4 million to 2 percent for filers and 4 percent for non-filers.
-
In 2018, an amnesty scheme for declaration of undisclosed assets was introduced but non-filers were barred from purchasing property valued above Rs 5 million.