Pakistan Budget 2020-21 and the Real Estate Sector:
On Friday the Minister for Industries Hammad Azhar presented the budget for the fiscal year 2020-21. PTI Government claims that budget is tax free and a great achievement in current scenario whereas opposition parties have rejected the budget on accusations that it will fail to manage the financial crisis. Let’s discuss the main highlights of Pakistan Budget 2020-21 and the Real Estate Sector.
Main Highlights of Budget 2020-21:
- Luxury Property Tax is introduced on Villas and Farmhouses. In case of large houses tax will be collected from PKR 1 LAC to PKR 2 LAC per year. But for farmhouses luxury property tax will be collected from PKR 25 per square foot to PKR 80 per square foot.
- FBR will evaluate the immovable property rate to bring it par with the market rate.
- The period for Withholding Tax (WHT) on sale of immovable property has been reduced from 5 years to 4 years. So no WHT if property is sold after 4 years of purchase.
- Capital Gain tax (CGT) period has also been reduced from 5 years to 4 years. No CGT if property is sold after 4 years of purchase.
CGT Rates:
2.5% CGT on profit less than 50 LAC
5% CGT on profit between 50-100 LAC
7.5% CGT on profit between 100-150 LAC
10% CGT on profit above 150 LAC
Full CGT if holding period in less than 1 year
¾ CGT if holding period is less than 2 years
½ CGT if holding period is less than 3 years
¼ CGT if holding period is less than 4 years
No CGT if holding period is more than 4 years
- PKR 30 Billion is allocated for Naya Pakistan Housing program.
- Advance Tax on Auction of Immovable Property to be Collected in Installments
- Sales Tax on builders will be levied by the provinces at the time of the sale of property at fixed rate of Rs 50 per square foot.
- Sales Tax on developers will be levied by the provinces at the time of the sale of property at fixed rate of Rs 100 per square foot.
- Low cost housings like Naya Pakistan Housing Scheme will be exempted from all provincial taxes.
- All provincial taxes (municipal taxes, duties, fees, registration fees and transfer charges) for urban properties will be clubbed under one head and charged at the rate of 2% of the property valuation.
- E-stamping system being introduced by all provinces.
- Federal Excise Duty on cement to be reduced from PKR 2 per kg to PKR 1.75 per kg.
Good thing about the Budget:
The introduction of the luxury tax on large houses, villas and farm houses is amazing. It will discourage the large size house construction. Luxury tax will not only create the revenue for the government but will also save the valuable land for other uses.
Bad thing about the Budget:
The Budget 2020-21 has failed to increase the number of filers in Pakistan. The tax ratio in Pakistan is lowest in the world. Unless more people are brought into the tax net, Pakistan will keep on borrowing and deficit will rise.
Pakistan Budget 2020-21 and the Real Estate Sector:
The budget is claimed to be a great economic booster but it will fail utterly. Real estate and construction sectors will keep falling because of;
Economy is in free fall;
The Budget 2020-21 is just a paperwork that has no resemblance to the reality. IMF says that Pakistani economy will decline by 1.5% in 2020-21 whereas government projection is 2.1% rise. Considering the inflation at 6.5% as the target of the government, the real GDP will fall by 4.5%.
The COVID-19 and Locust Attack are enough to destroy the economy of Pakistan. Unemployment is already high. Another War with India is in the picture. Who will buy property in such an uncertain political and economic situation?
Pakistan Debt to GDP Ratio Record High;
2003 and 2013 witnessed the property booms in Pakistan. During both booms the Debt to GDP Ratio was in decline. Debt to GDP Ratio in 2003 was 50% where as in 2013 it was 65%. But now Debt to GDP Ratio is 86% and increasing. So we can see where real estate prices are headed in Pakistan.
No end users to buy real estate;
The end users are the local Pakistani professionals & businessmen and Pakistani Expatriates. The purchasing power of local Pakistanis is in decline. Whereas Middle Eastern countries have passed the law that private companies can cut 40% pay of the employees. Remittances in 2020-21 will decrease by $5 Billion, the money required to construction 1 LAC homes. In current scenario real estate crash will continue.