Government Reforms to Regulate Real Estate in Pakistan

Pakistan’s real estate sector is an emerging industry. After a period of stagnation in 2017 due to the 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 are a great need and room for real estate development and growth in the real estate 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 the construction and housing sector to the country’s GDP has been consistently higher than 9 per cent 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 is 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 the 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 an immovable property with a land area greater than or equal to 500 square yards and/or having a flat with a covered area of 2,000 square feet or more. The step was taken to increase the taxpayer net. Similarly in 2010, an 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 the 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 per cent CGT was charged on the sale of properties withholding periods of up to 1 year and 5 per cent for those having a holding period of up to 2 years, while no CGT would be charged on properties withholding periods above 2 years.

Following this, the Finance Act of 2016 raised the advance tax on the purchase of immovable property with a value of greater than PKR 4 million to 2 per cent for filers and 4 per cent for non-filers. In the case of a sale, the property tax rate was 1 percent of the gross amount of the consideration received for filers and 2 per cent 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 the declaration of undisclosed assets was introduced but non-filers were barred from purchasing a 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)