LAHORE: The Punjab government, in a decisive policy shift, has formally replaced its outdated 66-year-old Annual Rental Value (ARV) system of property taxation with a Capital Value (CV)-based regime, marking a landmark moment in the province s fiscal and administrative landscape.
This transition, effective from January 1, 2025, was introduced through a series of amendments to the Punjab Urban Immovable Property Tax Act, 1958, passed as part of the Punjab Finance Act, 2024. Officials described the move as a historic structural reform that promises transparency, efficiency, and enhanced revenue potential without placing additional burden on the taxpayer. The reform, spearheaded by Secretary Excise and Taxation Punjab Muhammad Masood Mukhtar, an officer of the Pakistan Administrative Service, during his tenure emerged from a long-standing recognition that Punjab s property tax collection was woefully underperforming by both national and international standards. Despite being Pakistan s most populous province, Punjab s total property tax revenue lagged behind that of Chennai a city one-twelfth of its size. With property tax revenue contributing merely 0.05 percent to the GDP, compared to the 0.3 percent average across lower- and middle-income countries, the gap was glaring.
The ARV system had long been plagued by subjectivity, administrative discretion, and opportunities for manipulation. Tax assessments were based on estimated annual rental income determined by excise inspectors using variables such as locality category, occupancy status, and usage, all of which were vulnerable to human bias and underreporting. Valuation tables had not been meaningfully updated since 2014, creating fertile ground for revenue leakage and informal arrangements between assessors and taxpayers. With internal audit systems weak or non-existent, the system had effectively become a parallel political economy. The provincial government, alarmed by these inefficiencies and growing speculation that the Federal Board of Revenue might assume control over property tax, concluded that a fundamental overhaul was unavoidable. The reform s intellectual underpinnings were strengthened by empirical research conducted by a team of economists at the Lahore School of Economics. Using a data sample of over 20,000 properties, their simulations demonstrated that a CV-based system anchored in objective metrics such as plot area and DC-notified rates could not only eliminate discretion but also increase revenue, even at a lower nominal tax rate. These findings were subsequently reinforced through consultations with international partners including the World Bank, GIZ, and the Sub-National Governance (SNG) Programme. In a rare instance of policy-science alignment, the model s academic foundation served as a catalyst for formal adoption.
The role of Dr. Ali Cheema, Vice Chancellor of LUMS and a noted economist, was pivotal throughout the transition. His participation as a member of the provincial Resource Mobilization Committee (RMC) lent further intellectual weight and strategic guidance to the proposal. It was under his persuasive advocacy that the RMC granted in-principle approval to the transition, conditional upon its revenue neutrality and the assurance that no new financial burden would fall on existing taxpayers.
Following cabinet endorsement, the Excise & Taxation Department began the complex technical process of digitizing its valuation records, integrating them with the DC table maintained by the Board of Revenue. With nearly five million properties to reclassify, the challenge was formidable. A dedicated IT task force was established, and a Service Level Agreement was signed with the Urban Unit to modernize the backend systems. To enhance fairness, the government also replaced area-based exemptions with value-based thresholds. Under the new framework, properties valued under Rs5 million are fully exempt from tax ensuring that tax relief reaches genuinely low-income households instead of high-value properties occupying small plots in elite localities.
Despite internal resistance from field formations, who stood to lose discretionary authority and illicit gains, the department pressed forward. In an innovative move, the reform package included a performance-based incentive scheme for tax officials and a whistleblower reward mechanism for the public. Officials who detect and recover evaded taxes will be eligible for compensation, as will citizens who report credible cases of underreporting or misclassification. This inclusive approach was further extended with the introduction of a self-assessment system, modeled after income tax regimes, which allows taxpayers to calculate and file their own property tax returns online thus fostering transparency, trust, and voluntary compliance.
