Points, counterpoints: Fiscal sops afresh for real estate sector?

The realtors have again sought restoration of a provision in the tax law that allows people to invest undeclared incomes in real estates without any question being raised by the tax authorities about their sources of funds. They demanded that such questions about the source of an individual's undisclosed income, when he decides to invest the same in real estate, should not be asked also by any other authority or statutory body of the government.
Currently, anybody can use undisclosed money to construct or purchase residential buildings or flats by paying a certain amount of tax. While the revenue officials may or may not question the source of the funds, the Anti-Corruption Commission (ACC) can do this. This is also logical because the operational ambit of the ACC and that of the National Board of Revenue (NBR) are not the same.
However, the Real Estate and Housing Association of Bangladesh (REHAB) would like such an arrangement, being incorporated in the country's tax law, for not asking the sources of funds in an all-embracing way. It would furthermore like the same to be made effective from the fiscal year (FY), 2015-16. Otherwise, it fears that a substantial sum of money would fly abroad.
But the BEHAB is yet to clarify whether it wants the corruption-tainted money to be treated at par with not-so-tainted, undisclosed or undeclared (or tax-evaded or tax-avoided) fund. This clarification makes a lot of difference for a country like Bangladesh where corruption or graft has rather become the norm, not the exception.
Meanwhile, the realtors association, in support of its contention, argues that money is now flowing abroad to avail the opportunity of Second Home scheme or similar facilities for purchases of flat or property at abroad by the country's 'wealthy' sections of people. Such money will come under the tax net once their undeclared incomes are allowed to make investments in apartments at home, according to the REHAB.
In this context, the question arises: how far is the REHAB's claim tenable? In fact, this is going to be yet another year for the realtors to put forward such a plea; the sector is now passing through tough times as apartment sales have declined significantly. The sector's sales fell by, as much as, 60 per cent in 2013 and the situation is not any better this year.
People, having tainted undisclosed money in substantial amounts, are not at all interested in investing their funds in buying apartments and plots because of their fear of being asked by the ACC any time about the sources of their money.
Very recently, Finance Minister AMA Muhith admitted that there had been substantial capital flight from the country to Dubai and Malaysia because of slowed-down domestic investment activities in the private sector. The wealthy people from Bangladesh are investing mostly in buying apartments in Malaysia under the Second Home Scheme. Many local investors are also engaged in construction and other kinds of businesses in Dubai.
Many tend to believe investments in local real estate sector might jump if questions about sources of money are not asked. The existing law allows legalisation of undisclosed income after payment of a certain amount of penalties, upon disclosure of such funds. But then the issue remains about bundling up money, earned through legal or proper ways but without making payment of taxes with funds or assets accumulated or acquired through by corrupt or unfair means. Certainly, both kinds of funds must not be treated in the same way or manner.
The finance minister, in his pre-budget meeting with the realtors, noted that special facilities were otherwise given to the real estate sector in the outgoing fiscal, but there was hardly any positive outcome. He said there will be no special provision in the new budget for legalising undisclosed money other than the existing facility under the existing income tax law.
Meanwhile, the proposal for giving scope for legalisation of undisclosed income without question, has also come under serious criticism from various quarters at home. Such facilities, as the analysts note, do not yield any positive result for the economy. This is also highly unethical in the context of legality and justice. When many other priority sectors are barred from getting such an opportunity, why should the real estate sector alone get the same?
Meanwhile, the Bangladesh Bank's move for tracing illegal investments by wealthy Bangladeshis in Malaysia, Singapore and Canada has not yet succeeded in producing any immediate result. The Washington-based Global Financial Integrity (GFI), in its last report, said at least $1.78 billion, equivalent to Tk 137 billion, was siphoned out of Bangladesh in 2012 and $600 million, equivalent to Tk 46.30 billion, was smuggled out of Bangladesh back in 2010. The country's central bank is yet to find out the details.
A strong financial mechanism with an affordable lending rate for the middle class people, coupled with a relevant secondary market system, does need to be put in place in order to make the real estate sector otherwise vibrant. A provision for affordable mortgage financing for buyers could encourage people to go for more savings and investment.
As most of the people have hardly any capacity of their own to buy new flats, the need for reduction of registration fees, stamp duty and other taxes on sales of used apartments, merits attention in order to help promote the secondary market.
Entrepreneurs do also need to build up a positive image of the sector; many people do still believe, rightly or wrongly, that the real estate and housing businesses grab land, degrade environment, cause property bubble because of their non-entrepreneurial behaviour, and fail to hand over flats on time.
In this setting, some mechanism should also be devised by the relevant authorities for ensuring availability of housing loans at an affordable rate of interest. Such an arrangement was already there beforehand and was later scrapped in 2009. In many countries, specialised banks provide housing loans at less than 3.0 per cent rate of interest but in Bangladesh, the rate is too high, as also its inflation rate unlike that of the developed countries in particular.
As of now, 21,000 ready flats remain unsold as the financial institutions are not now giving the much-needed housing loans to the buyers. Without an affordable lending rate for housing loans, the existing stagnation in the real estate sector is most likely to persist. The sector now contributes around 7.0 per cent to the country's gross domestic product (GDP).
The emerging situation demands that something should be done to protect the interests of the buyers of apartments, industry operators and the economy. If the sluggishness in the real estate business continues, the country's economic growth will be affected; thousands of the people connected with the sector will be rendered jobless. It is high time for the authorities to look into the affairs of the real estate sector and help it come out of its existing deep-seated problems.
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