Real estate, construction sector awaits reforms, adjustments

Over the last decade, the contribution of the real estate & construction sector in Bangladeshi economy has tripled. For an exposition of the relative growth rate of Bangladesh real estate & construction sector over the decade spanning from 2001-2012, the following bar chart can be useful:
(Bangladesh Economic Review, 2012, Statistical Appendices)
In spite of the tremendous potential of the real estate sector, various factors are responsible for adversely affecting its development.
Land value distortion & solution to the problem: In many areas of Dhaka city, actual land prices negotiated between buyers & sellers was deflated in officials records. Since the current tax regime is an ad valorem system (Excepting the AIT), such cheating behavior is extremely detrimental to the attainment of proper revenue by the government. Lower reported price means lower tax payment. This causes an indirect impact on the prices of apartments and taxes paid on them too.
An alternative measure could be to adjust with market price and impose a uniform per square ft. or square metre tax amount on the land per annum, and to do the same for apartment floor space during each time it changes hand. This will eliminate the problem with deflated land prices & subsequent deflation in flat/apartment prices. But this will be a socially unfair measure. This is because all areas in a city do not have the same elasticity of demand. Also, this uniform tax regime disregards the difference in the quality of available land resources. A goods solution to this problem will be to determine price elasticity for different areas based on an integrated Economic-Infrastructural Profile, where important local industries, the available communication, utilities, and transportation facilities & their respective qualities will be quantified and ranked to be grouped into tiers of taxation ranges for a tiered tax system.
Tax evasion, shortage of supply and proposed solution: The total ad valorem tax rate is 11.5% as mentioned in the current tax structure section. Since this tax is based on the reported price of the transacted property, buyers and sellers have incentive to downplay the amount of tax to be paid by lowering the reported price. In order to expedite the process and remove incentives to cheat, only the gain tax of 2% and a VAT of 1.5% should be retained.
Other taxes should be struck down as part of an incentive to clear the market of unsold properties that has accumulated over the last 2 years due to lack of political stability & utilities shortage. There are around 22,570 units of flats/apartments left unsold in the portfolio of just 338 real estate companies, with an estimated value of 21,506 crore BDT. There are no less than 1200 members of REHAB, so the actual amount must be even higher. If, for example, the sector actually has 35,000 crore BDT in stuck-up investment in unsold properties, the government can raise an immediate 105 crore BDT in taxes under the new schemes (with other incentives to buy the properties), instead of the still unpaid 402 crore BDT in taxes that will not be earned till the apartments are sold.
There is a tendency amongst landowners to hoard land by refusing to sell until the lack of supply drives up the land price to exorbitant levels. Whenever any development project or public works contributes to increasing the land value in an area, the owners reap the benefit without paying for it in the form of tax. These loopholes must be closed for the government to make the real estate industry healthy.  An increased rate of holding tax on unutilized land to discourage land hoarding, and a capital gain tax on the difference between purchase price and the selling price of a land holding should be collected by the government. This will increase revenue, and decrease the interest in inflating prices without any sensible economic justification on part of the owners.
Absence of secondary property market: The market for used properties is not well-developed, due to economic mobility, and the maturation of our economy, such a market has become the necessity of the day. By providing a Real Estate Exchange System with adequate protection for traders, the government can earn revenues on two different ways: the commission of the exchange, and modest rate of tax on the properties that will be traded there.
Asset securitisation: The government should create a system of the securitization & sale of mortgages, and many other types of instruments. This can help the government in two ways; firstly, it can raise investment in the sector, thus indirectly contributing to the exchequer, and by the commission in the public exchange for the exchange of such securities.
Backward Linkage Industries: Countrywide, hundreds of different businesses belonging to different industries supply the materials needed for the construction & real estate sector daily. It is currently estimated that around 300 different enterprises serve in the backward linkage of real estate.
Cement industry: This industry is heavily reliant on foreign import of raw materials (clinkers, limestone and other chemicals); its demand structure is a pull/derived demand. The lack of sufficient growth in domestic demand has left a huge excess capacity in plants across the country. The problem of excess capacity can be addressed by promoting exports to foreign markets and an increase in real estate & construction sector business volume.
Ceramic Industry: Some of the problems of the industry includes: reliance on foreign imports of raw materials (China & India), underdevelopment of local raw material sources (clay from coal mining areas in North Bengal, Sylhet Area), utilities shortage leading to waste, and problems in business establishment. The government has two complementary policy tools to optimize the utilization of local resources for ceramic production: firstly, developing the infrastructure & incentive structure to promote the use of local raw materials (indirectly contributing to increase revenue like income tax, vat, and public utility earnings); and secondly, to increase tariffs & duties on imported raw materials thereby directly increasing treasury inflow while helping the domestic industry. Reducing the uncertainty & higher cost of utility shortage will help the industry to compete with lower cost in the world market, and reduce the cost for their domestic customers . This will increase tariff, excise and duties on export greatly.
Brick manufacturing industries:  Increased taxes on environmentally harmful obsolete technology to promote green brick production which will beneficial for Bangladesh in both short and long term. Bangladesh has about 6,000 authorized brickfields and numerous illegal ones. Government should penalize these illegal brick fields and ensure that these industries use the technology which efficiently uses energy or else they pay extra taxes to the government. By taxing traditional ones more, the government can possibly induce a significant portion of businesses to shift to the new type of brick for long term benefits.
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