Under-Invoicing in the Real Estate Sector of Pakistan

Introduction

In Pakistan, the market value of a property in the real estate sector is often found over and above its recorded value in government documentation. Under-invoicing or under-billing is a common practice in Pakistan’s real estate sector as the issue remains unresolved and ever-growing. By under-invoicing of land, the property serves the interest of a few people involved in the transaction, which makes this practice evasive and widespread. Parties involved in a transaction deliberately understate the value of the estate to avoid paying taxes. In most cases, the estate is valued 60-70 per cent less than the market value in the sale/purchase deed.

Under-Invoicing in the Real Estate Sector

Several direct and indirect reasons contribute to the ubiquitous nature of under-invoicing. Under the tax evasion strategy, traders report the lower value of assets and property on invoices relative to its market value. According to research by Abdul Wahid, Edmund H. Mantell, and Muhammad Zubair Mumtaz on under-invoicing in the residential real estate market in Pakistan, higher rates of taxation in the real estate sector are directly proportional to the extent of under-invoicing practices in the sector. However, this level of under-invoicing harms the real estate sector as tax-avoidance behaviour impedes development and revenue collection.

Another indirect but significant contributor to under-invoicing in the real estate sector is corruption. In Pakistan, documented corruption practices have surged to a record high and led to a 5-10% growth in ‘black money. This kind of corruption and the resulting black market led to the greylisting of Pakistan by the Financial Action Task Force (FATF) in 2018. Only recently, the FATF insisted under its recommendations plan that Pakistan registers all its real estate agents with Designated Non-Financial Business and Professions (DNFBPs) to prevent corruption and potential money laundering-terror financing activities.

A non-uniform and vague property valuation process is also a major cause of the under-invoicing of real estate properties. In Pakistan, three property rates are used to provide a valuation. The Deputy Commissioner rate (DC rate), Federal Board of Revenue (FBR) rate, and Market rate. The property valuation done for a single property under these rates all varies largely from each other. The market rate is the highest, followed by FBR and then the DC rate. The lack of standardization in the property valuation rate leads to the creation of confusion regarding the correct rate. Real estate developers and agents wishing to dodge the tax system benefit from this confusion and result in tax evasion. In addition, this also results in a large number of undocumented funds.

Besides the disproportionality in the different valuation tables, there is also a documentation gap that affects real estate property valuation. In unplanned areas or unregistered areas, properties are not properly categorized as residential or commercial as they are taxed accordingly. Houses and residential property have to pay fewer taxes compared to commercial property. But in different areas of cities, shops and offices are established and registered as residential real estate, thus avoiding taxes and contributing to under-invoicing practices.

Conclusion

The widespread under-invoicing of real estate properties in Pakistan has caused huge losses to the economy in terms of foreign and local investments. Enlarging the black market due to money laundering and other shady valuation practices deter all foreign investors from investing in the real estate sector of Pakistan. According to the JLL index, Pakistan has some of the least transparent practices in its real estate sector. A lack of regulatory oversight, standardization of valuation practices, corruption, rule of law, and accountability leads to such complex and hard to resolve practices. Pakistan needs to put in place a robust regulatory framework that can strategically deal with all the direct and indirect causes of under-invoicing in the real estate sector.