WEB DESK: Cities in Pakistan planned for rich housing-Dr Nadeem Ul Haque & Ali Salman The mere thought of a sudden central government intervention in a market phenomenon is fearsome. It may be considered nationalisation of real estate market.
The consequences of nationalisation of businesses are well-established as anti-growth, anti-jobs and anti-economy. The case of nationalisation of property markets will be no different-Ali Salman, Change in tax laws: Unintended consequences for property market, The Tribune, July 24, 2016.
Our bureaucracy and politicians appear incredibly efficient and quick as long as they need to protect their own interests or those who “finance” them. Capital Gains Tax (CGT) on disposal of immovable property at fair market price, to be determined by independent panels of State Bank of Pakistan, apparently/purportedly irked the powerful segments of Pakistan. Our worthy Finance Minister, who earlier asked the Parliament to enact the (rational) law on CGT, immediately came to their rescue and on Sunday (July 31, 2016) gave them relief (rather a gift) through Income Tax (Amendment) Ordinance 2016, with immediate effect. Long live Nawaz-Dar brand democracy that serves the rich and mighty and imposes unprecedented indirect taxes on the poor!
Federal Board of Revenue (FBR) has once again been used as a tool to help the rich and mighty. First, a law was passed through the Parliament and having it declared “bad” for real estate sector growth, concessions were secured for tax evaders, members of militro-judicial-civil complex, businessmen-turned-politicians and absentee land owners! Privately, some government officials say there was immense pressure from men in khaki, who matter in the land, as they are the biggest dealers in lucrative real estate deals. Why do elected governments give away State lands as rewards and awards to the powerful segments? Why do elected governments lack the will to tax enormous gains arising from such lands? Why do they grant unprecedented exemptions to generals, judges and high-ranking civil officials? These questions must be discussed and debated in the Parliament. It is hoped that champion of the cause of masses and true democracy, Raza Rabbani, Chairman of Senate, would take the lead in the matter.
Income Tax (Amendment) Ordinance, 2016 confirms that our elites have only one agenda: self-aggrandisement. Generals, judges, civil-military officials and politicians get State lands either free or at throughway prices and then are not ready to pay tax while selling the same at market price. This is also true for the big fish in real estate that make money through speculative transactions. These tax evaders, who have been parking black money in real estate, can now whiten the same by paying peanuts! While the ordinary Pakistanis are deprived of decent housing-annual shortfall is as high as 5 to 6 million-the government is continuously encouraging unscrupulous investors in real estate, land mafia, builders and developers, who will now shift their tax burden on buyers through newly enacted sections 7C & 7D of the Income Tax Ordinance, 2001.
The grabbing of State property by elites when millions are living below the poverty line is an odious act. The President has extended further tax benefit to these privileged classes through an Ordinance. The National Assembly will also pass it as Money Bill very soon. Nobody has highlighted that State lands/buildings given under the pretext of rewards and awards (free or at throwaway prices) cause a huge loss to the national exchequer. These can be sold at market price to retire national debt. The government on the contrary has waived tax on it!! In Pakistan the rich and mighty get tax exemptions and concessions and the ordinary citizens do not get even fundamental rights. Taxes, ruthlessly collected from the masses, and brazenly spent on providing luxuries to elites-palatial bungalows, fleets of cars, army of servants, foreign tours and what not.
Tragically, the citizens whose incomes fall below taxable limits under the income tax law are criminally taxed through the notorious withholding tax regime containing now more than 70 items. Funds, extorted from their hard earned money, are utilised for the luxuries of high-ranking civil-military bureaucracy, judges, President, Prime Minister, Governors, Chief Ministers, ministers, state ministers, advisers, MNAs and MPAs. In fiscal year 2015-16, they together squandered Rs 1200 billion on salaries, perks and perquisites. Not only this, these predatory elites have never paid tax on free or concessionary benefits and/or plots allotted in utter violation of section 13(11) of the Income Tax Ordinance, 2001, which says:
“Where, in a tax year, property is transferred or services are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the property or services determined at the time the property is transferred or the services are provided, as reduced by any payment made by the employee for the property or services”.
Section 14(b) of the Income Tax Ordinance, 2001 defines “services” to include the provision of any facility” and the concept of “fair market” is defined in section 68 as under:
“68. Fair market value.- (1) For the purposes of this Ordinance, the fair market value of any property or rent, asset, service, benefit or perquisite at a particular time shall be the price which the property or rent, asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the open market at that time.
(2) The fair market value of any property or rent, asset, service, benefit or perquisite shall be determined without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash.
(3) Where the price referred to in sub-section (1) is not ordinarily ascertainable, such price may be determined by the Commissioner”.
The Finance Act, 2016 added the following sub-section to section 68 of the Income Tax Ordinance, 2001 that irritated the influential segments of society:
(4) Notwithstanding anything contained in sub-sections (1) and (3), the fair market value of immovable property shall be determined on the basis of valuation made by a panel of approved valuers of the State Bank of Pakistan.
Now the Income Tax (Amendment) Ordinance, 2016 dated July 31, 2016 has amended it and thereafter added more subsections and Explanations as under:
(4) Notwithstanding anything contained in sub-sections (1) and (3), the Board may, from time to time, by notification in the official Gazette, determine the fair market value of immovable property of the area or areas as may be specified in the notification.
(5) Where the fair market value of any immovable property of an area or areas has not been determined by the Board in the notification referred to in sub-section (4), the fair market value of such immovable property shall be deemed to be the value fixed by the District Officer (Revenue) or provincial or any other authority authorised in this behalf for the purposes of stamp duty.
(6) In respect of immovable property-
(i) component A of the formula in sub-section (2) of section 37;
(ii) “consideration received” as mentioned in Division X of Part IV of First Schedule;
(iii) “value of Immovable property” as mentioned in Division XVIII of Part IV of the First Schedule; and
(iv) valuation for the purposes of section 111, shall not be less than the fair market value as determined under sub-section (4)
Explanation.-( 1) For the removal of doubt, it is clarified that the fair market value as determined under sub-section (4) or (5) shall be for carrying out the purposes of this Ordinance only.
(2) It is further clarified that for the purposes of clauses (i) to (iv) of this sub-section if the fair market value determined under sub-section (4) or (5) is different than the auction price the applicable price shall be the higher of the two.
As evident from above, sub-section (4) inserted by the Finance Act, 2016, passed by Parliament, has now been made ineffective through Presidential Ordinance giving powers to FBR to determine valuation of immovable property and where no such rates are notified property shall be deemed to be the value fixed by the District Officer (Revenue) or provincial or any other authority authorised in this behalf for the purposes of stamp duty. This is to facilitate the rich and mighty who do not want to pay tax according to fair market value.
On August 2, 2016, FBR issued rates for residential and commercial properties in Karachi, Lahore, Islamabad Hyderabad, Sukkur, Rawalpindi, Peshawar, Quetta, Abbottabad, Gwadar, Mardan, Gujranwala, Sialkot, Faisalabad and Sargodha. Do these rates reflect fair market price? What is the basis to say so? What if two parties negotiate price at lower or higher than the value notified by FBR? Why we do not go for actual recording of transactions. Through 15 notifications, FBR has categorised the different localities/areas for valuation of immovable properties for the purposes of CGT, withholding tax (section 236C and 236K) and section 111 of the Income Tax Ordinance 2001. However, FBR is totally silent how to deal with those who get State property free or at concessional rate for which section 39(1)(j) of the Income Tax Ordinance, 2001 is attracted. It declares the following as income chargeable to tax:
“The fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property”.
It is sad to note that the above provisions are not enforced in the case of influential segments of society in respect of State lands given as awards and rewards, free accommodations and other benefits-all covered in section 13(11) and 39(1)(j) of the Income Tax Ordinance, 2001. Now, Income Tax (Amendment) Ordinance, 2016 says that tax “shall be reduced by fifty percent on the first sale of immovable property acquired or allotted to ex-servicemen and serving personnel of armed forces or ex-employees or serving personnel of Federal and Provincial Governments, being original allottees of the immovable property, duly certified by the allotment authority.”
The citizens are justified to ask as to why they get plots from State free or at concessional rate and then huge tax breaks when they sell the same to make profit of millions of rupees? Allotment of one plot for own house can be justified but not for selling purposes! They also inquire why these elites are unwilling to pay taxes on their colossal incomes/assets. What makes them angrier is the fact that from their taxes these elites enjoy exorbitant perquisites and benefits.
It is worth mentioning that section 111 of the Income Tax Ordinance, 2001, dealing with unexplained investment/expenditure, has also been diluted in the case of investment in property through Income Tax (Amendment) Ordinance 2016 as actual purchase price is substituted by rates notified by FBR and where no such rates are notified, the value fixed by the District Officer (Revenue) or provincial or any other authority authorised in this behalf for the purposes of stamp duty. Is it not amnesty or protection to tax evaders? Finance Minister Senator Ishaq Dar has wrongly claimed that no amnesty is given. The reality as elaborated above is quite the opposite.
Many years back, an ex-Member of FBR wrote a letter to the then Finance Minister, Dr Hafeez Shaikh, that massive tax evasion/loss of revenue had occurred due to non-taxation of government property given to high-ranking officials at concessional rates. He and his successors did not take any action. Now, Senator Ishaq Dar, instead of recouping tax losses of billions of rupees, has extended further concessions to the mighty segments who are beneficiaries of State lands. The message is thus clear: some are more equal than others, rather are above the law. This is the real dilemma of Pakistan. Our politicians blame the men in Khaki that they do not allow them to work towards strengthening democracy but themselves violate the law with impunity and use it for self-aggrandisement or for the benefits of those who finance their elections!
As regards constitutionality of taxation of gain on disposal of immovable property by the federal government, we have already explained it in ‘Imprudent taxation’, The News, July 17, 2016 and ‘Tax on gain of immovable property: Who is violating Constitution?’, Business Recorder, March 14, 2014. The Federal Government by amending section 37(5) of the Income Tax Ordinance, 2001 vide Finance Act, 2012 levied tax on gain of immovable property on the basis of self-assumed interpretation of amended language of Entry 50 of Part I of Federal Legislative List. The phrase “not including taxes on immovable property” is wrongly construed to “include taxes on capital gains on immovable property”. Provinces have failed to understand that their right to tax gain on immovable property situated within their territories is indisputable and is being encroached upon by the Federal Government. Only Punjab levied this tax in the Finance Act 2013 contesting the authority of the Federal Government but has yet not made any effort to collect it or make a petition under Article 184(1) of the Constitution of Pakistan requesting the Supreme Court for settlement of dispute with Federal Government. Sindh, Khyber Pukhtumkhaw and Balochistan have shown total apathy and indifference towards highhandedness of the Federal Government for usurping their right of taxing gain on immovable property.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS). The views expressed in this article are not necessarily those of the newspaper)
Source: Business Recorder