The real estate sector in Pakistan has witnessed unprecedented growth in recent years, attracting investors from all over the country and abroad. While the booming property market may seem like a sign of economic prosperity, it also hides a dark secret – the prevalence of black money and the manipulation of property values to evade taxes. 

In this article, we will be exposing the dirty secret of Pakistan real estate and how it impacts the values determined by the Federal Board of Revenue (FBR). But first, it’s important to understand what black money means.

What is Black Money?

Black money refers to the funds that are acquired through illegal means or remain undeclared for tax evasion purposes. In Pakistan, black money has found a safe haven in the real estate sector due to various loopholes and lax regulations. Investors and property owners often engage in undisclosed transactions to avoid paying taxes, which has far-reaching consequences for the country’s economy.

According to a blog by Transparency International that appeared in IT’s newsletter on December 18, 2020, titled “Knocking on Kleptocrats’ Doors,” purchasing real estate in wealthy nations is one of the preferred ways for corrupt authorities to launder money from Gabon to Venezuela. In addition, they increase their wealth by investing in the most coveted cities globally. In several nations of the European Union, they even wager on gaining citizenship or residency privileges.

Read More: Zakat on Property in Pakistan’s Real Estate: A Comprehensive Guide

Real Estate in Pakistan 

People’s general desire to protect their future motivates them to invest in Pakistan’s real estate market. However, the previous government’s high taxes on the real estate industry have caused investment trends to decline, obliterating it entirely. Pakistan’s real estate market significantly contributes to economic growth, expanding even if FDI declines or infrastructure funding remains sparse. 

It ranks second in Pakistan in terms of employment creation after agriculture. In addition to creating direct jobs, it increases demand across more than 400 different economic sectors, from construction (cement, steel, paint, building materials, architects, and urban planners) to financial services (housing finance). 

As the government increased the amount of various taxes, particularly those relating to sales and purchases, severe measures were also imposed to demonstrate the financial backing of investments made in the previous three years. Because of the tremendous economic crisis that has affected this industry, many real estate consulting firms have closed their doors, and millions of individuals who work in it are currently going hungry.

Role of FBR in Pakistan’s Real Estate

The FBR announced new land valuation tables and updated property values in Pakistan as of March 2022. targeting the “black money” in Pakistani real estate. Many individuals are unaware of these prices or why they will affect particular real estate market segments. 

The Nawaz Shareef government adopted FBR values in 2016 when Finance Minister Ishaq Dar unveiled the FBR valuation tables in the 2016–17 budget. Stakeholders at first opposed the concept. However, the government and real estate executives later reached an understanding, and on July 31, 2016, the valuation rate was first disclosed exclusively for 12 cities.

By December 2021, 40 cities will be included in the coverage, up from 20 in 2019. For the first time, FBR pricing has been implemented in 20 cities. This is less expensive than the market price but much more expensive than the District Collector (DC) price.

Importance of FBR Land Valuation Table

Federal taxes like capital gains tax (CGT) and withholding tax are computed using the new FBR values. The FBR, DC, and actual rates are the three real estate evaluation rates used in Pakistan. Internationally, real estate transfers are taxed at the actual transaction amounts.

However, in Pakistan, real estate was taxed at DC values before 2016, and after that, federal taxes were taxed on the FBR rate, while provincial taxes are collected on the DC rates, both of which are still less than current market rates.

The following is determined using the FBR value:

• Federal taxes that need to be paid.
• White money declaration based on the purchase price of the FBR land.

Therefore, property taxes rise along with FBR values. Second, the amount of white money needed to complete that transaction rises. Both impact the real estate trade, but the white money declaration is more significant and has wider repercussions.

Exposing the Dirty Secret of Pakistan Real Estate

Black money, a component of our informal economy, has long found a home in the Pakistani real estate market. Most unscrupulous people in our society invest their ill-gotten wealth in real estate. 

Due largely to the allowed import of illicit funds by developed country real estate, developing countries, like Pakistan, continue to be deprived of their legitimate income and assets. Even in this day and age of deadly pandemics and despite the FATF’s hanging threat, money laundering from developing nations continues to be absorbed into the real estate markets of developed nations.

The threat continues to spread in these wealthy nations, either because their governments knowingly support it for their own economic gain or because they cannot control it. And they are likely completely unaware that some of this illicit money is constantly being used to finance terrorism.

In addition, businessmen and industrialists will invest substantial sums of untaxed money in real estate. As a result, it changed the real estate market in our country in the twenty-first century and made it simple to conceal illicit or illegal funds.

Therefore, preventing this illicit and undeclared money from entering the real estate market is the other significant benefit of implementing FBR values. 

Let’s imagine that a particular property has a market worth of 1 crore but an FBR value of only 30 lacs to appreciate better how real estate is the haven of black and grey money. This means that if you provided the seller 30 lacs through a banking channel and the rest 70 lacs in cash, you would have invested 70 lacs in real estate, money that wasn’t earned or wasn’t subject to taxes. It will now become your white money when you sell the property after a specific period of time and declare the additional funds as gains.

Read More: Real Estate and Its Negative Externalities

How Black Money Impacted Pakistan’s Real Estate?

The Pakistani property developers quickly understood the enormous potential for new real estate development to draw in this dark and grey economy. Investors would find these new developments more appealing because they experience frequent trading and speculative cycles. They can now easily invest unaccounted-for or grey money in real estate and have a chance to profit from speculative trading.

Simply put, a business owner may cheat on taxes by investing in real estate, and a corrupt public official, a drug lord, a terrorist, etc., can readily park all of their illicit funds there. 

For all of these people, investing in real estate in Pakistan has served as a perpetual amnesty, allowing them to store and accumulate unreported funds. Major price bubbles were observed in 2002–2005, 2011–2013, and in 2020–2022, following the grant of tax amnesty to the building sector.

White and declared money is being invested in these locations as property values rise, providing a simple way to make money. As a result, our manufacturing and industrial sectors suffered as investors, particularly in the last two decades, decided that investing in real estate in Pakistan is safer than expanding the industry.

The prevalence of black money in Pakistan’s real estate sector has several adverse consequences:

Reduced Tax Revenue

Due to underreported property transactions, the government loses billions of rupees in potential tax revenue each year. This shortfall can impede the development of essential infrastructure and services.

Wealth Disparity

The artificially inflated property market further widens the wealth gap in the country. Ordinary citizens find it increasingly challenging to purchase homes, while wealthy investors benefit from tax evasion and property speculation.

Economic Instability

The distorted real estate market can lead to economic instability. When property values become detached from reality, the risk of a property bubble and its subsequent burst increases, potentially causing financial crises.

Unaffordable Housing

The black money-driven inflation of property prices makes housing unaffordable for many Pakistanis, leading to a housing crisis in major cities.

What will happen if FBR Values Increase?

The amount of white money needed to buy a specific plot of land increases as the FBR value rises. We may predict that real estate transactions will decrease by 25 to 50% in the following years because we all know that our informal economy, which includes this black money, is about 50%.

This influence will be felt more keenly in industries where FBR value has increased and is between 60 and 70% of the market price. Any additional reduction will further reduce these transactions in the impacted locations. As of March 2022, I anticipate the following implications for some real estate sectors:

• Residential land transactions in some DHA Lahore stages would decline due to the recent increase in FBR values. This could lead to very slow development or perhaps negative growth in the coming years.
• Due to the significant discrepancy between FBR prices and actual market values, commercial plots and rental plazas in DHA Lahore will prosper.
• Due to the slight increase, the FBR land value will not affect the pricing in the DHAs in Multan, Gujranwala, and Bahawalpur. Instead, as speculative traders relocate to these regions, actual prices may rise.
• Investors will find construction projects more appealing, especially those signed up for the FBR amnesty program. In established neighbourhoods, end-user properties and rental units will continue to prosper.

If the above analysis does not cover your city, you can still determine how an increase in FBR values will affect you by applying the abovementioned logic. FBR values are not the only aspect to consider when valuing real estate, and they may not be entirely correct. Therefore, before investing, please evaluate other variables such as development, current prices, market attitude, etc.

The Post-2018 Real Estate Sector in Pakistan

Following the change of government in 2018, the real estate market experienced extreme difficulty. It has experienced difficulties with money, the economy, politics, a number of policy issues, and a lack of confidence. Due largely to significant investments made by Pakistanis living abroad, it survived the previous recession. 

Due to favourable currency rates for foreign investors, the Pakistani rupee’s depreciation made real estate investments more affordable. Real estate investing is already dangerous, given Pakistan’s current ranking of 120th out of 129 nations (scoring just 3.9/10).

For international investors, this kind of ranking is crucial. Due to this uncertainty and the tax laws, hundreds of foreign investors have moved their money elsewhere. The volume of foreign exchange invested in real estate has decreased due to these nations’ (such as the UAE and the UK’s) superior incentives.

According to SBP data, Pakistan received remittances of USD 21.84 billion in 2019–20. Due to their obstacles in operating other businesses, most foreign investments are made in the real estate industry. 

Overregulation of the real estate industry deters foreign investment and could result in a decline in remittances to Pakistan. The government’s strategy of not using development budgets has also reduced this sector’s activity.

The Future of Real Estate in Pakistan

The government will implement harsher policies in the future to steer this informal sector toward manufacturing and industry. These sectors have already received amnesty from the government, and the future course is clearly obvious. The market anticipates the upcoming budget’s higher real estate taxes and FBR values.

While some of us may not be pleased with the increase in FBR prices, it ultimately benefits Pakistan’s real estate market. A thriving economy will increase Pakistan’s population’s wealth and ability to invest in real estate. 

As patriotic Pakistanis, we must aid the government in eradicating corruption and tax evasion. Everyone benefits from a successful Pakistan, ultimately leading to a prosperous Pakistani real estate market. Therefore, it is advisable to invest in real estate, which is immune to a tougher government crackdown on the informal economy and black money and is not the centre of such black money.

The Bottom Line

The prevalence of black money in Pakistan’s real estate market and its impact on FBR property values is a pressing issue that needs to be addressed urgently. To combat this problem, the government must implement stricter regulations, promote transparency, and encourage honest reporting of property transactions. Only by curbing black money can Pakistan’s real estate sector contribute positively to its economic development and provide affordable housing options for its citizens.

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