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investment to other sectors
The real estate sector of Pakistan is again in the crosshairs. This
time Asian Development Bank (ADB) has demanded tax reforms for the
real estate sector. ADB advocated for the imposition of a new tax on
buying, selling and development of properties. It also demanded that
the government reconsider tax exemptions given to open plots after 6
years, and furthermore, asked the government to charge a tax for the
development of property.
ADB's proposal comes on the heels of the Finance Act 2024, which has removed the concept of holding period for capital tax on properties, which has already impacted real estate sector negatively. The bank’s contention is that tax exemptions in the real estate sector attract a lot of investment which should be going to other sectors such as agriculture and industry.
Yet in the same proposal, ADB also called for reforms on water and energy management, tacitly acknowledging some of the real reasons manufacturing and agriculture don’t attract investment. As per the Federal Minister of Energy himself, the country has the most expensive electricity in the region. This makes industrial investment risky and raises the costs of manufacturing.
Similarly, the agricultural productivity of Pakistan is one of the lowest in the world, with 80% of its water resources being absorbed by 4 major crops, namely rice, wheat, sugarcane and cotton. Its irrigation efficiency is also among the lowest in the world, at around 37%. Part of this can be attributed to the prevailing feudal system in Pakistan, with 5% landholders holding 65% of total farmland, which stymies efficiency. As such, without significant reforms to the sector, it remains unclear how discouraging real estate investment will contribute to investment in agriculture.
It would be wise to consider how the government can introduce reforms in industry and agriculture to make them more attractive for investment as given the state of these sectors currently, further taxation of real estate will not convince investors to switch their investments to these sectors. Most likely, investors will switch their investments to other productive assets such as gold, stocks and mutual funds, where decent returns are ensured, and greater transparency exists.
Sources:
The Express Tribune (1, 2, 3), The Nation
ADB's proposal comes on the heels of the Finance Act 2024, which has removed the concept of holding period for capital tax on properties, which has already impacted real estate sector negatively. The bank’s contention is that tax exemptions in the real estate sector attract a lot of investment which should be going to other sectors such as agriculture and industry.
Yet in the same proposal, ADB also called for reforms on water and energy management, tacitly acknowledging some of the real reasons manufacturing and agriculture don’t attract investment. As per the Federal Minister of Energy himself, the country has the most expensive electricity in the region. This makes industrial investment risky and raises the costs of manufacturing.
Similarly, the agricultural productivity of Pakistan is one of the lowest in the world, with 80% of its water resources being absorbed by 4 major crops, namely rice, wheat, sugarcane and cotton. Its irrigation efficiency is also among the lowest in the world, at around 37%. Part of this can be attributed to the prevailing feudal system in Pakistan, with 5% landholders holding 65% of total farmland, which stymies efficiency. As such, without significant reforms to the sector, it remains unclear how discouraging real estate investment will contribute to investment in agriculture.
It would be wise to consider how the government can introduce reforms in industry and agriculture to make them more attractive for investment as given the state of these sectors currently, further taxation of real estate will not convince investors to switch their investments to these sectors. Most likely, investors will switch their investments to other productive assets such as gold, stocks and mutual funds, where decent returns are ensured, and greater transparency exists.
Sources:
The Express Tribune (1, 2, 3), The Nation
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