Daily InsightsLand Use and Property Rights

Land Tax Reforms in The Real Estate Sector

By 16/09/2022 0 Comments

In Pakistan, investing in land is a common practice. Most people who do not have a running business buy commodities, equities or assets that includes a piece of land to be sold once the price increases. It is considered a safe investment, however, in a country with mounting debt, the government has to charge tax on properties to generate revenue. Since the real estate sector is flourishing, many people are dumping their cash in vacant urban lands and there is a significantly higher tax on vacant land. Landowners of large houses or large fixed assets pay the same tax as the owner of vacant land because land value taxation does not account for improvements in valuation. Furthermore, the payment infrastructure is not efficient. It is difficult to figure out the landowners who are supposed to be taxed as the process of transfer is very informal.

Even though the tax is similar on vacant land and built-up properties, it seems unfair to impose equal tax and landowners cannot be taxed without documentation. It gives people incentive to buy and keep more land as they can dump in hard cash and avoid being banked and taxed through different methods. Due to a lack of regulation and malfunction of the system, the target of tax collection cannot be met, resulting in low revenue generation and reduced economic growth. Also, it is difficult to determine the value of vacant land without development and improvement prices. Low property taxation encourages people to keep their land rather than selling for construction. All of these factors hinder the growth of the real estate sector and economic growth.

Many private societies have emerged in metropolitan cities to sell off vacant land and many people are taking benefits by not paying their taxes. It affects the economy badly in the long run and the government must take critical steps to regulate the tax system and charge fairly. Rather than imposing a similar tax on vacant land and an in-built property, they can impose a levy on a certain area of the vacant land, regardless of its improvement or even if it is unutilised. Government can also impose tax according to the type of lands such as vacant land, regular properties or ruined properties based on the market value. To apply this policy, the issue of different value market benchmarks which are DC Rate, FBR Rate and market value must be sorted out. Moreover, the implementation of the tax credit can safeguard agricultural land as without tax credit, people will use this land for commercial or business purposes by building housing societies, malls and plazas. This commercialisation will decrease the cultivable area food production. Taxing vacant land turned out to be an ineffective tool as payments are made through liquid money and an informal system of documentation leads to difficulty in finding land owners. To conclude, the tax policies must be regulated according to the situation of the country.

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