Current real estate taxes and fall of remittances

Does Fall Of Remittances Has Anything To Do With The Current Real Estate Taxes?

Ever since the Pakistani government introduced the Property Tax Amendments 2016, the real estate market has been experiencing a sharp decline in business activities. This move has led to properties becoming cheaper in most parts of the country after investors stopped throwing capital into the market. The new property law has also led to a fall in remittances which has been the saving face of Pakistan’s economy during hard times. Some reasons behind the fall in remittances after the introduction of the new property law are discussed below.

Overseas Pakistanis Are Key Contributors to Economy

A vast majority of Pakistanis living and working in foreign lands have single-handedly sustained our economy during financially hard times. These citizens have also been active as contributors to the real estate economy of Pakistan in the shape of sending back remittances home. A closer look at statistical data available in connection with remittances sent in the second half of 2016 shows that the trend has shown a steady decline. Is the recent property tax then responsible for discouraging overseas Pakistanis from investing in the real estate sector in their homeland?

Revision of Property Law and Its Impact on Remittances

The real estate market of Pakistan has been riding high atop a bullish trend since the past five years, until the new property tax was introduced by the federal government in the ongoing year. The local real estate market is currently undergoing a cooldown as property prices fall and big money leaves this particular sector.

So far, industry experts have placed the blame for this phenomenon on amendments made to Section 68 of the Income Tax Ordinance 2001 that led to radical changes in the market. This change has hit genuine overseas investors who now have to navigate through a new set of problems while making property investments in Pakistan.

For instance, overseas investors find the withholding tax policy inconsistent which consists of tax deducted at source. Currently, the rate of this tax has doubled from two to four percent on property purchased by non-filers simply because they are not residents here. Therefore, most overseas Pakistanis are refusing to invest in the country’s real estate market and the government is resultantly receiving less remittances.

The strange part about this issue is that on one hand overseas Pakistanis are exempt from filing an income tax return, but, on the other hand they have to pay withholding tax while buying a property here. As a result, queries related to Pakistan’s real estate market have fallen among overseas Pakistanis in the past few months; a trend that is likely to persist.

Looking Towards Other Investment Havens

Still bearing the shock of tax increases, a large majority of overseas Pakistanis are already looking at international destinations to invest their hard-earned capital. So far, Dubai seems like the most ideal market for investment. Ever since the imposition of the new withholding tax on banking transactions, the trend of real estate investment in Dubai has increased at a steady rate.

It is no secret that the real estate industry of Pakistan was anchored on the money received from overseas Pakistani investors in the form of remittances. But this trend is on the wane since July 2016.

The Way Forward

The situation of the real estate sector in Pakistan at present is such that buyers are being pressurized from all sides as capital gains tax has increased to 10 percent, advanced taxes increased to four percent, while stamp duty is up 50 percent.

Keeping the high importance of investments made by overseas Pakistanis for the economy in mind, the government should look closely into the new tax regime and make amendments accordingly. This will encourage overseas investors to divert their capital towards Pakistan’s real estate sector.

By : Babrak Khan Yousafzai