Open file transactions facilitate tax evasion in property sector: report

Open file transactions facilitate tax evasion in property sector: report

A recent report published by the Pakistan Business Council (PBC) highlights the prevalence of tax evasion in property transactions facilitated by open files, which are often exchanged without official transfer of ownership or payment of associated taxes. These undocumented transactions have allowed individuals to evade tax obligations, according to the report.

The real estate sector in Pakistan is characterized by a significant number of transactions conducted outside formal channels. Due to the nature of these transactions, it is challenging to accurately quantify the extent of tax evasion resulting from these cash-based and undocumented practices. Nonetheless, the report sheds light on some of the common methods employed in these transactions.

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Discussions with real estate agents revealed that open files are sometimes sold multiple times, often more than ten, before being transferred to an end consumer. This practice, known as arbitrage of files, allows intermediaries to make substantial profits without contributing to the national treasury.

Another common practice observed among realtors is referred to as “Bayane pe Bayana” in colloquial terms. In this arrangement, a real estate agent facilitates an agreement-to-sell (bayana) between a buyer and a seller. Typically, the buyer is an investor seeking quick returns. The agreement involves partial payment of the agreed price to the seller, with the promise to pay the remaining amount within a specified timeframe, usually 30-90 days.

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During this period, the real estate agent searches for a new buyer who is willing to pay a higher price than the agreed amount. The agent then sells the property to the new buyer, pocketing the difference between the price agreed with the seller and the price received from the new buyer. This practice, which often goes entirely undocumented and untaxed, can result in gains of up to ten percent of the property price if the market is active.

The report also highlights certain unethical practices among major players in the real estate sector, including builders and developers, who have benefited significantly from the sector’s growth at the expense of the general population. Some developers engage in overselling, where they sell more files than the available plots. While outright fraud is observed in some cases, others employ an interesting strategy to manipulate the market.

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After selling the plots, these developers spread rumors in the market to create panic, encourage widespread selling, and reduce market prices. Subsequently, the developers repurchase these files at rates lower than the initial selling price. This deceptive practice allows them to amass substantial gains from non-existent land at the expense of the general population.

The findings of the report highlight the urgent need for stricter regulation and enforcement in the real estate sector to combat tax evasion and protect the interests of the general public. Addressing these issues will require comprehensive reforms to ensure transparency, accountability, and fair practices in property transactions across the country.

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