Businessmen oppose capital gains tax on Real Estate as it will discourage investment in housing & construction Industry

  • June 12, 2009
The government should avoid slapping Capital Gains Tax (CGT) on real estate transactions as it will put negative impact on the growth of construction industry. Moreover, CGT is economically inefficient due to its penalizing effect on entrepreneurship and investment, hence it must not be considered for levying. This was the consensus opinion of businessmen in a meeting at Islamabad Chamber of Commerce and Industry (ICCI) presided over by its President Mian Shaukat Masud. They said imposition of CGT on real estate transactions will directly affect investment decisions in housing sector as well. They said many other sectors are affiliated with construction industry and slow down in construction activities will translate into low performance of all these sectors thereby negatively impacting the strength and potential for growth in the economy.

Mian Shaukat Masud said instead of squeezing the capacity of real estate industry through taxes, government should facilitate its growth through incentives to meet the rising needs of housing units. Quoting some figures, he said according to a World Bank report, Pakistan faces a critical housing shortage. Nationally, the average occupancy rate per dwelling is over six and estimates of unmet annual demand for housing units hover around 1.5 million. He said the housing shortage is especially burdensome in cities and towns where half the population lives in slums or irregular settlements. In urban areas, over 600,000 new dwellings are needed to satisfy current demand, yet only about 300,000 are being built according to current estimates. He said with provision of incentives, Pakistan can attract hefty investment in real-estate industry. The climatic conditions are suitable for construction all around the year, the land is rich with minerals and raw materials and the labor force is equipped with passion and skill to work in real-estate industry. Only government’s support is needed to create tremendous benefits for the economy by making real estate industry more vibrant and flourishing.

ICCI President said already the overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by more than 43 percent which stood at $2.2 billion as compared to $3.9 billion in the same period of last year while the CGT on real estate will cause further decline in it apart from reducing tax collections. This is because CGT acts as a disincentive for investment reducing economic growth. This contraction shall generate less tax revenue for the government. Moreover, there is no centralized structure present especially in Pakistan to keep a record of the transactions taking place in the real sector. Even where there is some adequate record keeping method present, the true valuations are almost difficult to determine. This inadequate documentation shall undoubtedly reduce the collections of CGT from the real estate sector. He said even in the United States, tax receipts from realizing capital gains have historically contributed around 2% to 3% to the total receipts. Hence if the well documented economies fail to collect significant tax receipts from CGT, it is unlikely that CGT will contribute any noteworthy portion to the tax revenue in Pakistan that has a large undocumented sector. Therefore, government should avoid levying this tax in the larger interest of economy.