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Under-Invoicing in Pakistan’s Real Estate Sector 2023

The market value of a property in the real estate industry in Pakistan is frequently discovered to be more than its declared value in official paperwork. Under-invoicing or under-billing is a frequent practice in Pakistan’s real estate business, and the problem is far from remedied.

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Under-invoicing of land serves the interests of just a few persons engaged in the transaction, making this practice deceptive and prevalent. To avoid paying taxes, parties participating in a transaction purposefully understate the worth of the estate. In most circumstances, the estate is appraised at 60-70 percent of its market value in the sale/purchase deed.

Several direct and indirect factors contribute to the pervasiveness of under-invoicing. Traders record the lower worth of assets and property on invoices relative to their market value as part of the tax evasion method. Higher rates of taxes in the real estate industry are directly related to the level of under-invoicing techniques in the sector, according to study by Abdul Wahid, Edmund H. Mantell, and Muhammad Zubair Mumtaz on under-invoicing in the residential real estate market in Pakistan.

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However, this amount of under-invoicing affects the real estate sector by impeding development and revenue collection.
Corruption is another indirect but substantial driver to under-invoicing in the real estate business. Documented corruption practices in Pakistan have reached an all-time high, resulting in a 5-10% increase in ‘black money.’ This form of corruption and the associated illicit market led to the greylisting of Pakistan by the Financial Action Task Force (FATF) in 2018.

Only recently, the FATF requested that Pakistan register all of its real estate brokers with Designated Non-Financial Business and Professions (DNFBPs) in order to avoid corruption and potential money laundering-terror funding activities.

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A non-uniform and ambiguous property valuation method is also a primary source of real estate property under-invoicing. Three property rates are used in Pakistan to determine a valuation. The Deputy Commissioner rate (DC rate), the Federal Board of Revenue (FBR rate), and the Market rate are the three rates. The property appraisal performed for a single property under various rates differs greatly from one another. The market rate is the highest, followed by the FBR rate, and finally the DC rate.

The absence of standardization in the property value rate creates uncertainty about the correct rate. Real estate developers and agents that want to avoid the tax system gain from the misunderstanding, which leads to tax avoidance. Furthermore, this leads in a substantial amount of undocumented cash.

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Aside from the disparity in valuation tables, there is also a paperwork gap that influences real estate property valuation. Property in unapproved or unregistered locations is not properly classified as residential or commercial and is taxed appropriately. Houses and residential property are subject to lower taxes than commercial property. However, in some city locations, stores and offices are constructed and registered as residential real estate, therefore evading taxes and contributing to under-invoicing activities.

The pervasive under-invoicing of real estate holdings in Pakistan has resulted in massive economic losses in terms of both foreign and domestic investments. The expansion of the black market as a result of money laundering and other questionable valuation techniques discourages all international investors from engaging in Pakistan’s real estate business.

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According to the JLL ranking, Pakistan’s real estate business has among the least transparent processes. Such complicated and difficult-to-resolve practices result from a lack of regulatory control, uniformity of valuation procedures, corruption, rule of law, and accountability. Pakistan must establish a strong regulatory structure capable of dealing with all of the direct and indirect causes of under-invoicing in the real estate sector.

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Syed Sadat Hussain Shah

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