[
Trillions are locked in idle plots; taxing unproductive assets can redirect savings into job-creating sectors
ISLAMABAD:
As the Federal Board of Revenue (FBR) presents its transformation plan as a success story during annual meetings with the International Monetary Fund (IMF) in Washington, the present tax-to-GDP ratio of 10.33% is still far away from the threshold of 15% — the fiscal tipping point for sustained economic growth and poverty reduction as per global standards.
In fact, we can’t solve the low revenue problem unless we tackle the low domestic savings rate. Pakistan has a savings rate of just 7.4% of GDP — compared to 27% in Saarc (the South Asian Association for Regional Cooperation) and 41% in Asean (the Association of Southeast Asian Nations).
Moreover, from an economic productivity point of view, even those private savings end up in unproductive or dead investments such as unconstructed plots or treasury bonds. As a result, no new jobs are created, and real incomes of the middle class stay stagnant or decline — leaving little room for savings.
This is a vicious cycle as speculative investments parked in undeveloped plots act as a major sink for national savings and prevent their conversion into productive, job-creating investments crucial for economic growth and increasing domestic savings. Trillions are locked in idle plots that are not available for capital formation but instead make the cost of housing and commercial space unaffordable.
So how can the government intervene in this regard? One way is to impose tax on deemed rental income of undeveloped or idle plots so that holding unproductive assets becomes costlier. This creates a financial incentive for owners to either sell the property to a developer or begin construction, thereby stimulating the construction industry and related 40-plus downstream sectors.
This should include agricultural land too, as it disincentivises landowners from holding excessive land that they can’t put into any productive use. For all practical purposes, it will act as a functional wealth tax on non-productive real-estate asset classes, and the rate can be indexed to annual inflation as well.
At the same time, the government should consider imposing higher capital gains tax on short-term holding of vacant plots or undeveloped files. This would cool down speculative price hikes and shift the market towards genuine buyers and developers.
The suggested tax measures are necessary disincentives, but they represent only one side of the coin. The goal is to redirect national savings into areas that fuel employment, technology, and export capacity. So, before the government takes any steps to discourage investments in plots, it should also facilitate investments into productive sectors by creating a regulatory framework that makes business cases feasible. Without such a complementary framework, investments would start pouring into other unproductive sectors such as gold, foreign currency, and speculative stocks.
Without protectionist measures, it is very difficult for the local industry to compete with cheap Chinese goods that have flooded our markets under the free trade agreement. However, if the government is willing to fund targeted subsidies and help investors import machinery by cutting off bureaucratic hurdles, then it could be a different ballgame.
The government could help the private sector secure technology transfer deals from China, offer initial subsidies for imports, and track impact in terms of job creation — with import substitution and export volume as a condition for continued support. At the same time, it needs to develop the corporate bond market to build a financing mechanism in the long run, as commercial banks hardly offer any sizable private sector credit.
Besides addressing these structural problems, bringing businesses into the tax net and formalising them remains a challenge to date. One can take a page from Vietnam’s playbook, which solved this problem by linking compliance with tangible economic benefits such as enhanced access to credit.
Pakistan needs to stay firm on its e-invoicing rollout and may offer incentives for compliance such as free insurance or cheap access to credit, while at the same time imposing fines for those who miss deadlines in adopting this digital system. Without proper incentivisation and threat of noncompliance, these initiatives could become part of the problem rather than the solution.
THE WRITER IS A CAMBRIDGE GRADUATE AND IS WORKING AS A STRATEGY CONSULTANT
