Tax amnesty for the real estate sector and its potential outcomes

The new national budget for FY21 came into effect from July 1, 2020. The budget contains a tax amnesty package that has two components: one, a flat 10 percent tax on the money invested in the stock market as well as on cash and other cash equivalents (Section 19AAAA and Table-3 of Section 19AAAAA) and two, special variable tax rate on the money invested in the real estate sector on the basis of size and location of the immoveable asset (apartment, building and land: Table-1 and Table-2 of Section 19AAAAA).  

This write-up will try to shed light on a few issues of the second component of the package, in light of the past experiences of similar packages as well as on prevalent views of civil society on such schemes.

Tax amnesty issues started becoming an eyesore to the civil society ever since such schemes were started by the martial law regime of Ayub Khan during the late 1950s in Pakistan.

In independent Bangladesh, such schemes were announced 16 times and around Tk14,000 crore were legalised this way.

Given the popularly believed size of the black economy and the volume of the reported capital flight, the volume of "whitened money" is considered pretty small.

It is widely believed that the lack of an appropriate tax enforcement mechanism has resulted in such poor performance of successive such schemes.

Can we expect a different outcome this time around?

As far as the principle of taxing the money invested in the real estate sector on the basis of the size and location of the asset is concerned, it can be considered a welcome move. Its simplicity and transparency can be hardly overemphasised.

In determining the tax liability of a taxpayer, it is determination of the tax-base (income) that often remains elusive, particularly in countries like Bangladesh, where hard evidences on people's income are difficult to come by.

In order to make the process leakproof, there are many rules in the statute books.

Caption: Tax amnesty for the real estate sector is demoralising to honest taxpayers. Photo: Salahuddin Ahmed

To make the rules operational, however, some discretionary power needs to be delegated to the tax officials.

And these human inputs make tax-base determination subjective and these, therefore, increase the maneuverability of the entire process of determination itself.

It is, therefore, imperative to have some hard and fast rules which are transparent and based on observable hard data.

And it is this criterion which makes size-and-location based taxing principle in the real estate sector a welcome move.

The size of an apartment, building or a piece of land - which is the tax-base in this case - is very much there in the registered document of the asset which everybody can see and given the tax-rate per unit of measurement, it is a matter of simple arithmetic for anybody to fix the tax liability of the owner of the asset.

The fact that "size and location of an asset" instead of "income" has been taken as tax-base in this income-taxing exercise is not surprising.

The two can be used interchangeably as will be made clear below.

On a point of morality, the first issue to be observed is the implied tax-rate in this scheme vis-à-vis the tax rates faced by regular tax payers.

Understandably, tax rate under any amnesty package will be lower. But how low should the rate go?

Assuming present market value of one square meter of an apartment space in Gulshan area at Tk250,000, a regular taxpayer who pays income tax under normal procedure has to pay income tax at the marginal rate of 25 percent, which comes to Tk62,500.

But if (s)he pays under the special scheme (s)he gets away with only Tk6,000 which converts into a marginal tax rate of 2.4 percent only.

For apartments at Dhanmondi, at assumed price per square meter of apartment space at Tk150,000 enacted scheme translates into amnesty tax rate of only 2.33 percent.

In the case of land, if one square meter of land costs Tk15,00,000 in Gulshan then the amnesty tax rate comes to 1.33 percent against the regular rate of 25 percent.

For Dhanmondi land, at an assumed price of Tk12,00,000 per square meter, amnesty tax rate comes to only 1.29 percent.

Special package embodied in the FY21 budget, therefore, appears to have offered very liberal schemes for those who prefer to disclose under the scheme and regular taxpayers are at a disadvantage.

From the long run point of view of the tax system, this is demoralising for honest taxpayers.

It will also invite the tendency to defer current tax payments on real estate investments to any such future amnesty scheme.

The second facet of the ethical issue is the hotly debated issue of allowing entry of black money earned through criminal activities or illegitimate means.

One existing similar provision in the law allows such lower rates on real estate assets, but barring investment of such black money. It failed to get much of a response.

The fact that the condition has been taken away this time implies that government has announced the package as a component of the broader stimulus package announced in response to the Covid-19 situation, perhaps keeping in mind the similar demands voiced by the business community.

However liberal the package may be in terms of the implied tax rate or the government's attitude towards whitening of money, it will fail to generate any respectable response if it is not followed up by stringent tax enforcement measures.

The probability of the non-responders being brought to justice must be sufficiently enhanced to make them face a much higher tax rate if a reasonable response is expected.

The author is a retired Commissioner of Taxes. He can be reached at [email protected].