Taxing Housing Societies in Pakistan

The city district administration of Lahore, according to media reports, has initiated a crackdown on developers, builders, sponsors and managers of private housing societies owing to the unlawful internal transfers of houses, plots and other types of immovable properties to the buyers. The step was taken in the wake of the promulgation of the Finance Act 2018, that requires necessary payment of government taxes before any immovable property can be transferred. Before this change in law, the developers were themselves transferring properties under the Stamp Act 1899.

Section 62 of the Stamp Act 1899, empowers the city district administration, through their sub-registrars, to impose penalty on such transfers of property. They are empowered to seal such housing schemes in case they fail to pay all government taxes while transferring any immovable property including internal transfers. Accordingly, the city district government directed their sub-registrars to issue notices to the concerned stressing that all such private societies must pay necessary taxes, and stop the previous practice of internal property transfers by themselves. While Section 3 of the Stamp Act 1899, defines ‘instruments chargeable with duty’, the Serial No. 63 A of Schedule I, defining stamp duty on instruments, is captioned as ‘transfer of right or interest relating to an immovable property’. “It relates to the transfer of right or interest relating to an acknowledgement of such transfer, by a development authority, housing authority, statutory body, cooperative housing society, company or a developer and every instrument by which a right or interest relating to an immovable property is being transferred, registered, recorded or acknowledged by the authority, body, society, company or developer”. The managers of private housing societies, therefore, argue that they are transferring properties under Serial No 63A of Schedule I.

Apparently, the issue is administrative in nature where the city district government is taking necessary steps to ensure payment of taxes by the private housing societies particularly in their internal transfers. In the short run, it is necessary to take such measures. However, it is just the tip of the iceberg when the issue is connected with a more complex phenomenon of scattered taxation in Pakistan. It is an indicator of how fragmented taxation is causing inconvenience to the government administration and taxpayers, resulting in revenue leakage. It may be noted that ‘registering property’ is one of eleven indicators in the World Bank’s annual business reports. As far as tax administration is concerned, there is a separate district revenue administration formed under the Punjab Land Revenue Act, 1967, that appears anomalous. The Commissioners/Collectors, Additional Commissioners/Additional Collectors, Assistant Commissioner/Assistant Collectors and Tehsildars are appointed under Sections 8, 9, 10 and 11 of this Act. A similar hierarchy exists at the federal level in the Sales Tax Act 1990, and the Income Tax Ordinance 2001. The sales tax and income tax laws also provide for similar hierarchy of authorities such as Commissioners, Additional Commissioners, Deputy Commissioners and Assistant Commissioners. If one sees the situation through the eyes of a novice investor, it is not a difficult to understand why our ease of doing business is continuously on the decline, at least, since 2006. There is one main reason and that is ‘scattered taxation’ at multiple levels through multiple agencies.

Why can’t such anomalies be handled through a single tax department? It is indeed a gigantic administrative and legal anomaly that the federal, provincial and district governments are separately spending their scarce resources in monitoring the tax changes brought about by the Finance Act 2018. A similar practice may also be observed in the cantonment boards under the Ministry of Defense. They have established their own tax authority under different laws. This legal trend suggests that after the independence of Pakistan, our practical legal issues were not highlighted and necessary research was not carried out to handle them. Therefore, registering and taxing properties are dealt by different laws exercised by different departments. Unfortunately, our policymakers shy away from discussing and handling many legal issues merely on the premise that such laws were framed by the British, assuming that there is no scope of improvement. This is the real neglected area that requires exclusive focus of the PTI government. Instead of spending our resources and precious energies in a haphazard, scattered and diluting manner, for the same purpose of capital taxation, a focused and concentrated legal approach is pivotal for ensuring good tax governance.

Efficient capital taxation in Pakistan is a big challenge because there are multiple tax laws exercised by different authorities at different tiers. Many countries in the world have undergone large scale tax surgeries to ensure efficient capital taxation. For example, the 1992 Norwegian tax reforms boldly introduced neutrality among different types of capital and their corresponding uses. Despite these reforms, the housing capital remained an exception. This shows that housing taxation requires clear and dedicated singular laws with a view to checking low imputed value of taxation alongside their corresponding imputed rate of return. Their accumulated effect has a direct impact on the marginal effective tax rate. It may be remembered that reforms are a continuous process requiring short term and long term measures. The steps taken by the city district government may improve tax collection as a short term measure. However, research on the daunting task of harmonising tax laws in Pakistan requires dedicated efforts. For example, the Ministry of Finance may consider announcing PhD scholarships for the pre-defined projects on harmonising and integrating taxes in Pakistan. The Federal Board of Revenue (FBR) and provincial tax authorities may forward their peculiar tax anomalies to the Ministry of Finance. It can then transform those anomalies into formal research questions framed by a high powered think tank and ask the interested candidates to carry out their doctoral research on these very specific topics.

One such project could be ‘the merging of the Punjab Land Revenue Act, 1967, the Sales Tax Act 1990, the Income Tax Ordinance 2001 and other similar tax laws’ for which the Ministry of Finance can occasionally announce PhD scholarships. We already have established institutions such as Lahore University of Management Sciences (LUMS), Pakistan Institute of Development Economics (PIDE), and Institute of Business Administration (IBA) that can play an effective role in this regard. Apart from long term measures, an ever dynamic and active Council of Common Interests (CCI) can perform a great job in defining our singular national tax framework through meaningful dialogue among the federating units.

This theme of singular taxation will indeed strengthen the federation of Pakistan in contrast to the argument that it may weaken the country. It is actually all about effective negotiations with the federal and provincial stakeholders. An effective panacea is needed to practically activate the CCI and introduce a culture of continuing negotiations on integrating provincial and federal taxes and their authorities. The agenda for such negotiations should be prepared by the above mentioned think tanks, which are in line with Pakistan’s short term and long term strategic economic interests. The recent action taken against housing societies by the city district administration of Lahore is just an example of how scattered taxation has made our entire economic and financial system hostage to the unbreakable shackles of legal lacunas. The way forward is to continue research, negotiations and make well informed bold decisions.