Pakistan: Frontloading Taxation on Real Estate Transactions–Appraising an Abrupt Tax Policy Choice

Abstract

Until 2012, Pakistan's real estate sector painted a paradoxical situation in that, while on the one hand, it was the storehouse of the bulk of Pakistanis' wealth, on the other, it was as good as tax-free. The Federal Government, deftly leveraging an apparent drafting change in the 1973 Constitution made vide 18th Amendment adopted in 2010, sneakily treaded into what traditionally was considered an exclusive provincial tax domain by introducing capital gains tax on immovable assets vide Finance Act, 2012. Similarly, a negligible withholding tax rate on the seller was also imposed at the transaction (registration) stage, which was followed by an identical buyer's tax in 2014. The past decade has seen the pendulum being shifted completely. The sector is the most profitable yet has contributed practically nothing to the national exchequer. It has been at the center stage of public debate in the media's spotlight and under the government's heavier tax hammer lately. While the PTI government's excessive incentivization may have led to sucking much of the national wealth into the so-called “non-productive” real sector, the PDM's excessive taxation may be tantamount to virtually choking the real estate market with all its negative economic fallouts. The Finance Act 2024 may be the last nail in real estate's coffin. This paper, adopting a simple, straightforward, and focused approach stock, takes the steep rise in taxation of the real estate sector at the transaction stage to critically gauge its impact on the real estate market (defined in terms of the number of transactions undertaken) as well as the tax revenue that it generated, and proposes a suitable course correction.