Dubai: Investment flows into Dubai property market from India and Pakistan could come under severe pressure as tax authorities back in Indian and Pakistan take a closer look at overseas purchases made by their citizens.
In particular, on the sources of income for such purchases and whether this income has been declared or not.
News reports emerged from India on Wednesday saying that hundreds of resident Indians in Mumbai and Kerala have come under the scanner of the tax authority, after they could not properly reveal how they got the funds to buy property in Dubai. Real estate sources say the scope of the investigations on overseas asset purchases made by resident Indians could expand.
Indian investors continue to be heavy hitters in Dubai/UAE real estate; in the first 11 months of 2018, they pumped in Dh10 billion worth of funds. It is not known what’s the split between resident and non-resident Indian (NRI) purchases.
But sources say that a significant portion could have been from resident Indians, especially as the Indian property itself was going through a tough phase following the 2016 “demonetisation” move. (In November 2016, India declared that it would be withdrawing older currency notes, and which immediately slowed down the working of the economy. Its effect is still being felt.)
Unleashing the taxmen
India in recent months has been trying to get its tax receipts up, part of a series of moves to get the economy back on track. The latest budget, announced on February 1, made it tough on those Indians – carrying non-resident status - generating a significant portion of their wealth from within India to get away without paying taxes.
The current move on people owning real estate abroad is part of that gameplan. The rationale - you just cannot escape paying taxes.
Pakistan’s Amnesty spreads wide
In Pakistan, the 2019 Amnesty scheme has worked well - the number of resident Pakistanis who had declared their assets topped 76,000 plus. The scheme offered by the Imran Khan Government allowed resident Pakistanis to disclose all undeclared assets by paying a flat 4 per cent.
This applies to assets held by them within Pakistan and abroad. In the first 11 months of 2018, Pakistani investors put up nearly Dh3 billion to acquire properties in Dubai.
“While the 4 per cent rate is relatively low, there are subsequent tax implications for the asset being declared,” said an investment consultant specialising on Pakistani tax laws. “Fixed income (such as bank deposits) and cash assets are taxed considerably lower than equity or real estate assets.”
According to the current tax slabs, the tax on “equity investments” are at 35 per cent for capital gains and 30 per cent on rental income. But the tax rates on fixed-income assets are only 5-10 per cent.
“This has resulted in an incentive for individuals to reclassify assets from equity to debt,” the consultant said.
Will Dubai’s property market feel the squeeze as resident Pakistanis and Indians lower their investment exposures abroad? That’s the multi-billion dirham question confronting developers and property sellers here.
In the past, any ripples within these economies have been felt in this market as well. As far as ripples go, the taxman’s scrutiny counts as a perfect storm.
Real estate consultants in Pakistan that ‘Gulf News’ spoke to were noncommittal about the Amnesty’s short- to medium-term impact on real estate purchases. “I’ll not try and guess what it could mean for investments into Dubai or other real estate destinations,” said a consultant with a leading property brokerage firm in Karachi.
“But the Khan Government’s reforms seem to have worked well in improving the prospects of Pakistan’s own real estate space after years of weak to no-growth.”