Tax hike to help divert money from real estate to ‘productive’ sectors

ISLAMABAD: The real estate sector should be taxed heavily, as it doesn’t contribute considerably to the country’s economic development. Besides, there is a need to make a sophisticated export sector in order to attract investment, said Dr. Ali Hasnain, Head of the Department of Economics at the Lahore University of Management Sciences (LUMS) and Member Independent Economic Advisory Group (EAG), while talking to WealthPK.
Dr Hasnain said the government ought to facilitate the export sector and make it more sophisticated to attract investment.
‘’In Pakistan, a person drawing an average salary invests in the real estate on the assurance that the land value will definitely appreciate and he will have to pay very little tax. However, no one wants to invest in the stock exchange or in other productive sectors that may contribute to the country’s economic growth,’’ he said.
“Investors don’t invest in the real estate for its fundamental value but for the chance to sell it to a greater fool. The real estate sector is working under the ‘greater fool theory’, as every owner tries to sell to a greater fool,’’ Dr Hasnain continued.
He observed that a low savings rate of 20% is the country’s fundamental problem compared to neighboring countries, which have much higher savings rates. Investment into being a more productive tomorrow is a savings rate and we are not doing that which results in a lower growth rate, he said.
‘’There are many vacant/empty houses in the country built by investors to earn profits in future. This sector is growing extremely quickly in comparison to the rest of the economy. By contrast, if the investors invest in an export sector or any other productive sector like the stock exchange of Pakistan, the country’s economy would undoubtedly benefit,’’ he added.
Dr Hasnain bemoaned the fact that the country’s economic policies have placed more attention on the import sector showing very little tendency towards the export sector. At present, exports represent only 8% of the GDP, while imports account for 16%.
‘’The export industry needs to be prioritized in order to raise the percentage of exports. There is a higher probability that investors will switch over to productive investments if the real estate taxes are hiked. On the other hand, government support will undoubtedly lead to an increase in exports,” he said.
Dr Hasnain suggested that unproductive investment in land should be taxed at a higher rate so that investors might shift their financial capital to a productive sector that could help the country increase its exports and reduce the import bill.