- November 14, 2023
- Posted by: Muhammad Afzaal
- Category: RBS News
On October 27, it was reported that the Pakistan Institute of Development Economics (PIDE), a think tank affiliated with the Planning Commission, highlighted substantial discrepancies in property valuation rates and put forward a solution. Their proposal suggests the elimination of both the rates notified by the DC and FBR, with the replacement of an auction market system.
The existing market rate, reflecting the actual prices at which real estate transactions take place, stands at approximately 5 to 10 times higher than the DC rate and 2 to 4 times higher than the FBR rate.
PIDE has proposed the adoption of an online portal for property sales, where anyone can acquire a property at a price 10% above the listed bid price on the portal.
To address valuation discrepancies, the proposal recommends a formal real estate market with property auctions through an online portal, issuing contract certificates for property transfers upon agreement and payment.
Currently, the real estate market relies on FBR, DC, and market rates for revenue purposes, with the DC rate largely determining property prices. DC rates were introduced in the 1980s to enhance efficiency, revenue, and price control.
Provincial stamp duty and CVT are based on DC rates during property mutation. The federal government shifted property price determination authority to commissioners with the Income Tax Ordinance 2001 and the process was detailed in the Income Tax Rules 2002.
To narrow the valuation gap, FBR introduced property valuations in 2016 aligning with market rates, updated in 2019 and 2022. Capital gains and withholding tax use FBR valuations in some areas, while the DC rate applies elsewhere.
Proposal for an Auction-Based Real Estate Market
Substantial evidence supports the need for a reformed approach. To address the valuation gap, the proposal outlines the following steps:
Abolish DC rates and FBR valuation tables.
Publicly list all properties for sale on a dedicated portal.
After the contract is finalized, list it on the exchange for a minimum of two weeks, referred to as the contract period, before property transfer is allowed. Legal authorities should mandate the public disclosure of all contracts on the exchange for two weeks before transfers can proceed.
The sales contract must include the following information:
a. Sale price
b. Sale deposit
c. Closing date
d. Escrow deposit for potential defaults
The specified contract period enables an auction-style market with the following terms
a. Any prospective buyer can outbid and assume the contract under the following conditions:
i. The bid price must be at least 10% higher than the previous bid.
ii. The new bid must match or surpass the previous bid in terms.
iii. A deposit, double the amount of the previous bid, requires unless the full price paid upfront.
iv. Deposits held in escrow and forfeited in the event of a default.
b. The settlement date may shortened but not extended.
The PIDE of Local authorities will only authorize legal property transfers when these conditions are verified by portal administrators. However, this mechanism may not apply to property transfers to family members through gifts or inheritance.
Mandatory pre-registration on the portal, along with the required information, is necessary for all participants.
For more information check out RBS.