The FBR real estate valuation kerfuffle

By Abdullah Niazi

The real estate industry is up in flames. At the beginning of this month, the Federal Board of Revenue (FBR) announced that they were revising the valuation prices of immovable property, including commercial, residential, apartments, flats and other areas of 40 selected major cities of the country.

Since the announcement, there has been outrage coming from realtors, property dealers, and investors. The results of the revised valuations have not instantly become clear, but in the few days following it has become apparent that immediately the market is bound to slow down. Already reports are coming in of major deals falling through with buyers pulling out at the last second, and sellers suddenly finding a conspicuous lack of buyers for both their residential and commercial plots. Essentially, the FBR has increased their valuation of the property prices for two reasons. The first is the very obvious one, which is that they will use this increased valuation to generate more tax revenue from real estate transactions. The second reason is that the real estate business in Pakistan has long been a cesspool of black money, hyperinflated values, tax evasion, and all other manner of shady practices. While the market value of real estate in Pakistan is high, its official value on documentation is usually quoted as quite low in an attempt to keep taxes payable low. The new rates have made an attempt to fix this very old problem — the official value of plots of lands being much lower than the actual market value of the same plots. This problem has been around for a while now. Its roots are in a complex system of DC rates and FBR rates that anyone who has had to go through the displeasure of buying and selling urban property will be familiar with. It is a system based on lies, deceit, and attempts to evade taxation. Through its property valuation, the FBR is essentially trying to bring the official rate of property and the market value together. In its current attempt, the board may have overshot a little, since there are a lot of cases in which their valuation has actually been higher than the market valuation. However, the FBR has already said it will negotiate with stakeholders in the

industry, which means that the extra valuation is simply there as wiggle room for when the government inevitably negotiates with the real estate industry to bring the valuations down.

Real estate in Pakistan

Feel free to skip this brief section. Mostly because it doesn’t exactly have to do with the current problem, but is instead a brief comment on the nature of the real estate industry in Pakistan. In July 2020, Faroor Tirmizi did a story for Profit titled ‘Why (and how much) Pakistanis overinvest in real estate.’ The story pointed out how even though the obsession with real estate has understandable foundations and originates in a fundamentally good idea: the need to buy assets that generate inflation-beating returns, it has gone too far and is now starting to create a drag on economic growth, investment opportunities, and housing affordability. Real estate in Pakistan is a strange obsession. It has been co-opted by some of the shadiest characters this country has seen and because there are such few regulations, things very easily manage to get out of hand. Pakistan real estate agents and realtors don’t really have licenses or exams that qualify them to do the job that they do. It is easy to find loopholes in documents and development is vapid and relentless. These are many of the characteristics that have made this sector the degenerative mess that it currently is. It is also why it has been accused of being used to park black money, and because of which organizations like the IMF and FATF are unhappy with Pakistan, which we will discuss further on in the story. Taxes is where the issue begins. Under Section 236C of the Income Tax Ordinance 2001, anytime there is a sale of an immovable property a specific percentage from that sale must be paid as tax to the government. Currently, that percentage is 1% for residential plots in Pakistan. Essentially this means that if you own a plot worth Rs 35 million (3.5 crore) and sell it for that much anywhere in Pakistan, you will have to pay Rs 350,000 on that as Advance Tax.

Now because of this tax, buyers and sellers of real estate found that it would be much easier to simply exchange Rs 35 million amongst themselves while listing the official price of the plot much lower. So if Person A sold their plot for Rs 35 million to Person B, both would agree that on the official documentation they would write the value of the property actually being Rs 10 million. This would mean that instead of paying Rs 350,000 in Advance Tax, they would now be paying Rs 100,000 in advance tax. Similarly, all other taxes paid based on the value of the property would be reduced including things like stamp duty.

When this practice became common, real estate also became a hotbed for parking illegally obtained money. A person that had made Rs 50 million can buy a plot for that much, and the documents show that they bought it for Rs 20 million. They would pay tax only on that and in the process convert the rest of the Rs 30 million into ‘white’ money as well. It is a complex and sinister process that became very common once immovable property started being seriously taxed by the government.

“Property prices in Pakistan have always been high. The situation was made worse by the fact that a large number of investors that came into this sector early had black money. Other major investors in this sector were overseas Pakistanis. Asa result it has become a complete industry and a very profitable business,” explains Shahab Omer, a journalist with expertise in the real estate sector. “Even as the industry grew, its contribution to the national tax net was equal to the salt in flour. There was one percent registration fee and one percent stamp duty. Even this was paid on made up prices that people would write on documents, and not on the actual prices that these properties were being sold for. This is where the start of the infamous ‘DC’ rate system began.”

Why the FBR evaluates property prices

The story has been the same for a long time. Property is taxed by a lot of different institutions, from the FBR to the municipality. But how is the rate of taxation on property determined? Every single plot of land that is sold, whether commercially or residentially, goes for a different price. Two 1 Kanal plots next to each other in DHA Phase VII in Lahore might have varying prices. One plot might go for a hypothetical price of Rs 25 million and the other might go for Rs 27.5 million. Now, logically, it would appear that the solution to this would be to tax each piece of property based on the price it goes for.

This is how things were done in the past, except this method had serious flaws. The more technical flaw was that this method of taxation had the potential to become quite unfair. Say, for example, that you own the earlier mentioned

I think the people who are working on the new valuation in the FBR are very smart because they have deliberately increased these rates from three hundred to four hundred percent so that even if the real estate sector negotiates at that rate, even then, the property remains at fair market value

Shahb Omar, real estate journalist

plot in Defence Phase VII in Lahore and need to liquify your investment at the earliest. While the plot could possibly go for as much as Rs 30 million, you might be forced to sell it at Rs 24 million. This would mean that a person taking advantage of your situation to get a good deal would have to pay less tax on property that could otherwise have earned the government more money. The more significant problem was the one discussed above, in which undervalued prices would be given officially which would mean tax would not be paid at the actual market rate of these plots. This is when the FBR decided to start evaluating properties itself and assigning general rates. Under this system, suddenly there was an attempt to assign values to certain areas and charge all real estate in those areas tax per that valuation. So going by the earlier example, if the FBR valuated a 1 Kanal plot in Defence Phase VII in Lahore at Rs 25 million, the tax payable on the sale of that plot would be Rs 250,000 even if it were officially sold at a rate of Rs 10 million or a rate of Rs 30 million.

This naturally shook the real estate market up since they could no longer play as fast and loose with the rates as they once could. Things were now getting tighter. However, it was apparent that the FBR rates were lower than market value. At this point, Pakistan now has three different valuation systems for real estate, which is an anomaly possible the world over. There is the DC rate, which is usually almost 10 times lower than the actual market rate, and then there was the FBR valuation rate which was around 3-4 times less than the actual market rate. The DC rate would be the one that is used for stamp duty purposes and at this rate property is registered with Property Registration Authorities. The FBR rate is the one at which Withholding Tax is charged according to their “filer” and “non filer”status and FBR requires explanation of sources at least to the extent of this valuation.

Why these valuations matter

Again, it is a simple matter of math. The price of a plot is the price at which all taxation surrounding it will be calculated. Now that the FBR has increased its valuations, it has essentially raised the taxation rate on the property business. And this time around, the FBR has not been kidding around with how they have increased the prices. The last serious such push came in 2019, when the FBR had jacked up the valuation rates of property by 30 to 85 per cent but this time the unprecedented increase was made with effect from December 1, 2021, whereby the real estate agents stated that the rate went up by 100 to over 600 per cent in one go.

According to one report in The News International, the valuation table for DHA-1 Rawalpindi for the residential property per Marla increased from Rs 640,000 in 2019 to Rs 4.5 million per Marla off the road and Rs 5.4 million per Marla on the road. For the commercial property, the valuation has been increased from Rs 3.5 million per Marla in 2019 to Rs 8.5 million per Marla.

There are also other serious examples of over the board increases in property valuation by the FBR. In 2019, what the FBR had done was bring the valuation prices close to the actual market prices of real estate. This time, they have increased the prices more than the market value. For example, there is a signifi-

cant increase in the valuation of plots in DHA Lahore. By the new valuations, the FBR estimate of what a 1 Kanal plot costs in Defence Phase VII is Rs 43 million (4.3 Crore) while the market value for such a plot is actually Rs 30 million (3 Crore). The increase in property valuations has been across the board. Just in Lahore, the per Marla rate of residential and commercial properties has increased in 1235 localities of Lahore. This increase is fair enough since earlier even the FBR was undervaluing property prices. However, in some areas such as in the example of Defence Phase VII, the prices have gone even above market value.

In the same report by The News International, it was also pointed out that The Federal Board of Revenue has increased the rate of each of its categories for the properties in Karachi and in a few cases changed categories, which the property agents say the valuation has gone even up by 300%. Islamabad has also been a particularly dire example, where for example, the valuation for an apartment in E-7 has been quoted as Rs 251,500 per sqft. An average apartment covers around 2,000 sqft, which means such an apartment would be valued at close to Rs 503 million. Another similar example as per FBR valuation, an 800 sq ft one bed apartment in remote B17 sector of Islamabad is worth over 8 Crore. Selling price of Apartments in B17 range between 6500-8000 but they are declared as 105,000 per Sq Ft. and in E11 Islamabad the rate is 8000 Sq Ft.

Are the valuations too high?

In short, yes, they are right now. But this has been a long time coming and this is also very much a tactic from the FBR, which is planning on using these overshot estimates in their negotiations with the real estate industry. In the short term, the response has naturally been panic. And there has also been a lot of accusations that the wild valuations on the part of the FBR have come because of pressure from the IMF and the FATF.

“The rate of all these taxes has been increased in the new valuation. Apparently with this new valuation, it seems that the government is trying to take real estate in the market towards fair price, but in reality this is not the case,” says one real estate expert not wishing to be named. With this valuation, the real estate market has suddenly panicked because the new property rates for the areas that have been given are unrealistic. “I think the people who are working on the new valuation in the FBR are very smart because they have deliberately increased these rates from three hundred to four hundred percent so that even if the real estate sector negotiates at that rate, even then, the property remains at fair market value,” says journalist Shahab Omar.

The real estate sector has been frustrated by all of this. Different associations have come forward and said that they condemn the over valuation and want to negotiate with the government. However, in conversations with Profit, their representatives have had to admit that it is high time to match market value prices with documented prices of real estate as well. “We admit that there has been a problem in the past. But right now the FBR has made valuations that are ridiculous and it is imperative that prices are brought back to a normal level” said a ranking member of the Real Estate Professionals Forum wishing not to be named. “The entire business is going down at this point and the FBR needs to come to the table at least. Meanwhile speaking to the media, the chairman of the same forum has said that the change in valuation would backfire as the sector has already been struggling and foreign investors would be reluctant to invest in the country because of the policy changing every now and then, and that the government has done this on the behest of foreign powers.

The FBR to its credit is not paying hardball. In a statement posted by the board’s spokesperson’s twitter account, the FBR said that “the recently notified property valuation by FBR was finalized through a consultative process by the Field Formations. However, if there are some instances of valuation beyond the market price, the same will be reviewed in consultation with the key stakeholders.”

This means that the board is willing to revise their valuations. It also means that because of the panic that has set in, the real estate sector will also be willing to negotiate more easily. “There was pressure from the IMF and the FATF that might have resulted in these new valuations as well,” says one of the experts Profit spoke to. “This will mostly affect people that either bought plots to flip houses or as investment. It will not affect the average home buyer because if a person wants to buy a house for themselves the extra tax won’t feel like a big hit. It is mostly a problem for those parking their money in plots and trying to turn black money into white,” they said.

The comment is a pertinent one. Because black money can so easily be hidden in property in Pakistan, it has been a cause for concern for organizations like the FATF. So while this might have been done to get Pakistan off the grey list and away from the black list, there is still the factor that in any case this was long overdue. n