Pakistan’s current economic crisis while painful, may actually be an opportune time for the country and its leadership – civil, military, and corporate – to undertake much-needed reforms. One of the areas that has long needed reforms is the flawed tax system and real estate sector.
The real estate sector forms the bulk of Pakistan’s informal economy, estimated at somewhere between 30% and 50% of the documented portion of the economy. As an editorial in Dawn noted, “It would not be wrong to assume that no effort to reform the nation’s flawed tax system and document the economy can succeed without first making it impossible to park one’s dirty money in real estate assets.”
Not only does the current system cause massive tax revenue losses to the national exchequer, the unregulated real estate business is responsible for several other serious issues facing Pakistan as well. “For starters, it is a major cause of unplanned urbanisation that has eaten into swathes of prime fertile agricultural land. Land prices are artificially inflated by developers through the sale of unregistered plot files that have acquired the status of a private parallel currency, making housing inaccessible to low- and middle-income segments of the population. It is also one of the main reasons for the increasing inequality in society.”
All of these issues came to fore recently when former Federal Bureau of Revenue (FBR) chairman Shabbar Zaidi called real estate ‘the parking lot’ of untaxed or dirty money. Zaidi also claimed that he was summoned by then army chief General Bajwa when Zaidi attempted to take measures to tax real estate transactions and stop the business of ‘plot files’ to discourage people from hiding their illegal money.
As the Dawn editorial noted this shows the deep links to the establishment “through housing development projects under the DHA brand in major cities of the country. It is common knowledge that Pakistan’s business elite, bureaucracy, politicians, judges and other affluent sections have been the biggest beneficiaries of the unregulated and undertaxed real estate sector. No wonder, every government has encouraged the investment of dirty money in real estate through multiple tax amnesties, in addition to heavily subsidising investors by not regulating and taxing them — at the expense of the economy’s organised sectors.”
Will Pakistan’s existential economic crisis lead to reforms in this sector?