Fbr rates for property in Pakistan is hot issue these days as FBR has recently made upward revision in already prescribed FBR rates.
We believe most of our readers have an understanding of FBR prescribed rates for valuation of Immovable properties. For those who are not clear about these rates, following a detailed information about these rates and why these rates were introduced.
Why there are FBR rates for property
Cost of any asset we purchase or expense we incur has direct connection with FBR, as it is FBR’s duty to be satisfied whether the money used to buy those assets or fund those expenditures were properly taxed at first stage (at the stage when this money was earned). In case there is any indication that buyer is not taxpayer / non filer then it creates doubts about whether the money is tax-legal. So FBR can initiate action against the buyer. We understand that it is not necessary that all buyers should be taxpayers or filers there are exceptions available within the law itself.
So FBR can initiate action against the buyer. We understand that it is not necessary that all buyers should be taxpayers or filers there are exceptions available within the law itself.
Keeping you in above narrated scenario, you would agree that the single most important thing would be the value of that asset or expenditure as in case of underdeclaration, FBR would not be able to investigate the tax leakage.
Lets understand this by an example.
Lets assume Mr. A has been taxpayer but he usually understate his income by 50% i.e. if he earns Rs 1,000,000/- he declares only Rs 500,000/- and remaining routed off the records cash or benami transactions. By doing this Mr. A has accumulated a wealth of Rs 5,000,000/- but officially has only Rs 2,500,000/= (due to underdeclaration). If Mr. A buys any asset worth Rs 5,000,000/= the FBR may questions the difference of Rs 2,500,000/= since FBR records shows Mr A’s worth as Rs 2,500,000/-.
Lets assume Mr. A has been taxpayer but he usually understate his income by 50% i.e. if he earns Rs 1,000,000/- he declares only Rs 500,000/- and remaining routed off the records cash or benami transactions. By doing this Mr. A has accumulated a wealth of Rs 5,000,000/- but officially has only Rs 2,500,000/= (due to underdeclaration). If Mr. A buys any asset worth Rs 5,000,000/= the FBR may questions the difference of Rs 2,500,000/= since FBR records shows Mr A’s worth as Rs 2,500,000/-.
Now here comes the role of real estate market, which has been favourite arena for tax-evaders. In Pakistan immovable property has to be registered with registration authority where value is taken as higher of actual deal rate or rates as per registration authorities’ own books. For example in Sindh, if any property is transferred revenue department would compare the actual deal rate (communicated by buyer / seller) with rates as per their books (as per Sindh provincial law) and choose higher of two to apply registration / transfer charges.
We understand that these rates were introduced to curb underdeclaration of immovable properties rates. For example if any property is Rs 1 million as per provincial books but actual deal is executed at Rs 2 million then Rs 2 million (Higher of Rs 1 million or Rs 2 million ) would be considered for registration / transfer charges.
It is not difficult to manipulate actual deal rate for example in above example if buyer / seller intentionally under-declare their deal rate to as low as Rs 100,000/- even then the system would consider Rs 1,000,000/- (being higher of Rs 100,000 or Rs 1,000,000) for all official purpose i.e. registration / transfer etc.
However this Rs 1 million was required to be updated from time to time so that any manipulations by buyer /seller would not have any effects on Government’s Revenue. Unfortunately those provincial rates were not updated and the situation become weird as provincial values are very low when compared with actual market of immovable properties.
Buyers / sellers were taking advantage, of this legal delay in update of values, by declaring lower rates of actual deal.
The most problematic part was not the registration / transfer charges the Government was losing due to this delay in value update, but the value to considered for the purpose of reconciliation by FBR of the taxed earned money was also the same provincial value. FBR despite knowing that the person cannot purchase any particular asset, due to his low wealth position, was not able to take action as the values were supported by provincial authority, and FBR was not empowered to go against those rates as per Income Tax law.
In this way tax evasion, was to some extent, took support from provincial law. However in the year 2016, Federal Government feeling the loss caused due to this tax leakage started its efforts to streamline provincial authorities immovable properties rate in line with market rates which was declined by Provincial authorities.
Resultantly, FBR traveled long route of prescribing FBR rates for property in almost all areas in Pakistan (however these do not cover whole Pakistan but major cities). These published rates are applicable for collection of Federal levies at the time of registration / transfer of immovable properties.
Initially, immovable properties rates for major cities in Pakistan were published in the year 2016 in the month of July. However these rates were not equal to the market rates but were representative of almost 30% to 40% of the actual market rates which were somehow better than the provincial rates.
However after lapse of almost two and half years the Government felt the need to revise these rate in upward direction.
For immovable properties rates as prescribed the year 2016 please refer our post Click here
