Pakistan’s Real Estate Taxes May Hinder Investment Appeal Compared to Neighbouring Countries

By Desk On Aug 25, 2024

KARACHI: Pakistan’s complex property taxation system might be reducing its attractiveness for real estate investment when compared to neighbouring countries, despite having some advantages in individual tax categories.

A recent report titled Pakistan’s Real Estate Taxes & Trends, published by the House Building Finance Company (HBFC), highlights significant reforms introduced in the FY25 budget aimed at boosting revenue, curbing speculation, and enhancing transparency in the real estate sector.

However, the report reveals that these new taxes have increased the financial burden on property transactions, potentially diminishing Pakistan’s competitiveness in the regional real estate market.

The report includes a comparative analysis with seven other countries—India, China, Singapore, Hong Kong, Bangladesh, UAE, and Malaysia—to evaluate Pakistan’s new tax structure in a global context. This comparison shows notable differences in real estate tax frameworks across these markets.

Capital Value Tax (CVT)

The report notes that Pakistan’s 2% Capital Value Tax (CVT) on property value is unique in the region, as other major South and Southeast Asian economies do not impose a similar tax.

“This additional cost on property transactions could put Pakistan at a competitive disadvantage in attracting real estate investment,” the report warns, pointing out that the CVT, combined with other property-related taxes and fees, increases the overall cost of property dealings in Pakistan. This distinctive tax burden may make Pakistan’s real estate market less appealing compared to neighbouring countries, potentially affecting its position in the regional investment market.

Capital Gains Tax (CGT)

Pakistan’s Capital Gains Tax (CGT) on property, set at 15% for filers and 45% for non-filers, presents a mixed picture when compared to other regional countries. This rate is higher than Singapore’s zero percent for properties held for at least three years and Hong Kong’s exemption for individuals. In contrast, China has a flat 20% rate, while the UAE does not impose a federal CGT for individuals, making it more attractive. Malaysia’s recent introduction of a 10% CGT for residents is lower than Pakistan’s rate for filers.

“Pakistan’s CGT structure, especially for non-filers, may be seen as less competitive, potentially impacting its attractiveness for property investment,” the report states.

Stamp Duty

Pakistan’s stamp duty on property transactions, ranging from 2% to 5% of property value or circle rate (whichever is higher), is generally competitive within the region. While it is significantly higher than China’s 0.05% for residential properties, it is lower than Bangladesh’s 4.5% for larger apartments and 5% for land. The UAE’s rates of 2% to 4% are similar to Pakistan’s.

“Stamp duty rates in Pakistan are comparable to other countries, but the additional 2% CVT on property value potentially increases the overall tax burden on property transactions,” the report adds.

Registration Fee

Pakistan’s registration fee for property transactions, ranging from 0.25% to 1% of property value depending on the province, also presents a mixed scenario. According to the report, this fee structure places Pakistan at a disadvantage compared to countries like China and Singapore, where no registration fees apply.

In conclusion, while Pakistan has taken steps to reform its real estate taxation, the report suggests that the increased tax burden could deter real estate investment, especially when compared to the more competitive tax environments of its regional counterparts.