This is a package for tax regime for persons engaged in construction industry as builders and developers. This is a time-bound package which ends on June 30, 2023. Under this regime, incomes, profits and gains from any construction project from the sale of houses, flats, commercial or industrial spaces, units or plots of such projects will not be taxed under the normal procedures of the Income Tax Ordinance, 2001. Such incomes, profits or gains shall be taxed on basis of square feet/square yards of the property as the case may be. This is called ‘Fixed Tax’. This is final tax in all respects. If a company is engaged as builder or developer the dividend from such income will also be exempt from tax. There is no minimum tax in this case.
Time period for the regime is completion of the project by June 20, 2023. [Previously it was June 30, 2022]. It is suggested that the date should be further extended. Completion has been defined under the law.
Secondly, the source of investment by the builder or developer in the project shall not be enquired under the provisions of the Income Tax Ordinance, 2001.
Thirdly, the source of investment of the purchaser of plot, house, flat, commercial or industrial space, units or plots of the project will not be enquired under the provisions of the Income Tax Ordinance, 2001.
This is a comprehensive package covering tax impact from all angles. The intimation, with respect to immunity for the same has to be made by June 30, 2021 previously it was December 31, 2020.
Primary Elements of the Regime
There are three core elements of the regime which are:
a. Fixed Tax for Builders and Developers;
b. Immunity from enquiry for the source of investment by the Builders and Developers; and
c. Immunity from enquiry for the source of investment for the ‘buyers’ of these properties.
All these aspects have been briefly and generally described in the following paragraphs.
The purpose of the package is to accelerate construction and housing in the country and to channelize funds in the businesses of construction and development of properties. The investor either builders or developers and the purchaser of such property have been relieved from enquiries by the tax officers for their source of investments. Investment in a project can also be made in the form of plots or property already held by a person not recorded for tax purposes provided the same is used for the project of construction by the date prescribed under the law.
All the three components of the package are independent in nature however there is a strategic inter-dependency.
Naya Pakistan Housing Development Authority [NAPHDA] has been provided special concession is the rate. No credit will be allowed against the tax liability except payment on registration of properties [236A and 236K]
Fixed Non Income Based Tax
Any income, profit or gain from a ‘Project’ registered with Federal Board of Revenue [FBR] by June 30, 2021 will be subject to a fixed tax. The word ‘project’ has been defined in the law. The rates of fixed tax are laid down in the Eleventh Schedule to the Income Tax Ordinance, 2001 [Annexure 2]. The incomes, profits or gains qualifying under this regime will not be subject to tax under the normal provisions of tax. Fixed Tax is the only tax on income from such projects. With reference to such projects the persons engaged will be termed as ‘builder or developer’. The incomes, profits or gains from the project will be that from the sale of the property. The regime is not a substitute for or is relevant for property built or developed which is used for rent purposes.
All persons, being individuals, association of persons and companies (whether listed or otherwise) are entitled to opt for a fixed tax regime in respect of a project so registered under the regime.
This is a time-bound regime. Time period is related to the completion of the project which has been defined under the law. This regime will be applicable for projects to be completed by June 30, 2023. The date of completion has been defined under the law. There are only two conditions to qualify for the regime (i) Project Registration with FBR, (ii) Completion of the project by June 30, 2023.
Concept of Fixed Tax
Under this regime the tax liability of the builder or the developer of a project will be determined on the basis of square feet area of the building or the plot or the area developed by that builder or the developer as the cases may be. Each project will be accounted for separately. For example, in case of a person being a builder of a commercial building in Karachi the total tax liability (whether there is income or loss on the project) shall be equal to Rs 250 per square feet. In other words, if a commercial building is built having a covered area of 10,000 square feet the tax liability of the builder for that project will be Rs 10,000 x 250 = Rs 2.5 million. Actual profit or loss in building this project is not relevant for determining tax liability. In this case if actual income, profit or gain from that project is say Rs. 4 million then there will be no tax on that Rs. 4 million. Similarly, the dividend out of that Rs. 4 million will not be subject to tax in builder or developer is a company. It is however stated that the ‘maximum’ amount of income that can be incorporated in the books of accounts (generally called documented money) cannot exceed 10 times of the tax liability. In case of this example it will be Rs. 25 million.
In case if any builder or developer intends to record any actual profit over and above the said amount then there will be tax at normal rates on that excess amount. It is however clear that there is no requirement to keep any particular type of record of expenditure or determination of actual profit at least for tax purposes.
FBR is suggested to provide guidelines for determining actual income, profit or gain from the projected or any deemed basis for the same to avoid abuse of discretion.
Project to Project Taxation
The income will be computed on project-to-project basis. If a builder or developer has more than one project each project will be taxed separately.
When the Fixed Tax will be payable?
In case if the project is not expected to be completed in one financial year (July 1 to June 30) the liability as above will be spread over the estimated project’s life. For example, in the above illustration if the project’s completion life is two years then Rs 125 per square feet will be payable in each year.
Under the present law, irrespective of the actual project completion life the maximum project life cannot exceeds 36 months (two and a half years).
Yearly liability as calculated above shall be payable in four equal instalments in a year by way of advance tax.
Comprehensive Concession-Income & Dividend
The concessions under the tax laws are comprehensive. There will be no withholding of tax whilst making payments to a builder or developer. Builders or developers will not withhold tax.
On payment for building materials except purchase of cement and steel there will be no withholding on payment on construction related services rendered to a project. However if the service provider is a ‘company’ the builder or developer will withhold tax as per laws. This provision needs reexamination.
There will be no minimum tax on persons and project designated under this regime.
In case if the builder or developer is a company then there will be no tax on dividend paid by that company to its shareholders. There will be no withholding on payment of such dividends. This is an appreciable concept as there should be no difference in the incidence for a company vis-à-vis individual or association of persons [Partnership]. This step will promote ‘corporatization’ in this sector. This is the first time when this important aspect has been taken into account in the tax laws. As discussed earlier, dividend will be exempt from tax equal to an amount equal to 10 times of the tax liability. If the dividend is over and above that amount then the same will be taxable.
Incomplete Projects
The projects which have already been commenced before the introduction of this regime being April 17, 2020 can also opt for the fixed tax regime.
Under the law any project, whenever commenced, can opt for the fixed tax regime. For that purpose there shall be a determination of ‘percentage of completion’ upto the accounting year end of that builder or developer. For persons maintaining June 30 as the year end it will be accounting period upto June 30, 2019. Where accounting year ends on December 31 it will be December 31, 2019. For example, if a project has commenced construction in 2018 and it opts for the fixed tax regime then a percentage completion by the year end as referred above will be determined under the procedure provided in the regime and that will be declared by the builder or developer. Say the same is 50% complete by December 31, 2019. If the project opts for the fixed tax regime then tax equal to 50% of the rate prescribed shall be payable during the remaining period from January 1, 2020 to the date of completion of the project in the manner laid down in the law. The income for the preceding period will be determined under the normal system.
The settlement/determination of income for the preceding period is a technical issue and the same has to be looked into on case-to-case basis. It is suggested that a mechanism for tax on the preceding period is to be simplified to encourage the builders and developers of an incomplete project to avail the concessions, benefits and simplicity provided in this regime.
The percentage of completion is to be approved under the regime.
Registration
Fixed Tax regime shall be available for the income of the project which is registered with the FBR for this purpose upto June 30, 2021. Previously it was December 31, 2020.
Registration is to be made on web-portal. The builder or developer is required to file an irrevocable option to be taxed on fixed tax basis.
Immunity from Enquiry of Source of Investment in the Project
As an incentive to promote investment in construction and housing sector this regime provides immunity from enquiry for the source of investment by the builder or developer in any project that is subject to the provisions of this regime.
Under the Income Tax law the taxation officer is entitled under Section 111 of the Income Tax Ordinance, 2001 to enquire about the source of any investment. In case if the owner of that investment is not able to identify the source as being non chargeable to tax then the said sum is taxed as ‘undisclosed income’ along-with penalty equal to the amount of tax. Where the tax law provides an exemption from that enquiry it is called ‘Immunity’. The construction tax regime provides immunity from Section 111 for investments in the projects if registered upto June 30, 2021. This is very big concession.
The immunity from source is not restricted to sums lying in Pakistan. Any investment made whether held outside Pakistan is also entitled to such immunity. Accordingly, if a person has some undisclosed sum outside Pakistan then such sum can be invested in the project and the source of the said sum cannot be enquired under the tax laws of Pakistan. Similarly, if a person being non-resident for the purposes of tax in Pakistan owns an undeclared plot in Pakistan then the same can be brought within the fold of the regime. This essentially provides an honorable way for repatriation of undisclosed asset held outside Pakistan without tax incidence. Both Pakistan and the person declaring will benefit.
The exemption from immunity is limited to ‘individuals’ only. This immunity is not available to a company. However, such individuals can make investment in the project through a company. In such cases it is necessary that the company so formed is a single object company and the person claiming the immunity is the shareholder of that company. It is however required to be clearly understood that immunity from Section 111 which is an additional benefit has nothing to do with persons who can opt for the regime in general. It is independent but inter-dependent. It is reiterated that all persons, including a company are entitled to avail/opt for fixed tax regime. However, undeclared property or the cash can be introduced in a single object company as capital investment. That source of that capital investment will be immune from enquiry under Section 111 of the Income Tax Ordinance, 2001.
Valuation for the purposes of immunity
The law provides immunity from source for investment in the project for cash as well as property being a plot. For example if Mr A has Rs. 100 million undisclosed cash and a plot measuring 4000 square yards in Korangi Industrial Area then both the cash and the plot can be brought in investment in the project and the sources of funds for both these assets cannot be enquired under Section 111 of the Ordinance.
However, it is necessary that the plot so brought in is registered in the name of person claiming immunity or in the name of the single purpose company so formed as any date before April 17, 2020 being the promulgation date of the regime in the law.
The cash so claimed has to be deposited in a separate bank account indicated to the FBR.
This is a manner of trail for future inflows or outflows of funds. The funds shall only be used for the purposes of the project. It is highly important to note that deposit of cash in a particular account is only for the funds which are to be claimed for immunity under Section 111 of the Ordinance. For the funds which are declared there is no requirement for deposit in any particular account.
Valuation of land and building for the purpose of the regime is an extremely important subject. It is a known fact that in Pakistan actual values of properties are neither equal to the values notified by FBR or that identified in the sale deeds. Generally, the actual value is higher than both the values referred above. The regime provides that for the purposes of this regime which includes immunity from enquiry under Section 111 of the Ordinance the value shall be higher of:
130% of the FBR Value; or
Lower of valuation determined by two valuers notified by the State Bank of Pakistan.
For example, in the above illustration the plot can be valued at 130% of the FBR or lower of any two independent valuations by the valuers as are in the list of State Bank of Pakistan. The second situation arises only in a case where the value is higher than 130% of the FBR value.
The aforesaid immunity from enquiry is an additional incentive. Accordingly, the conditions laid down in this portion are not mixed up with the general principles applicable for fixed tax regime
Change in Ownership
Change in ownership of the project shall not be allowed, in principle, in the cases of projects where immunity has been claimed under Section 111 of the Ordinance. However, the following practical situations have been catered:
The transfer of ownership to legal heirs and succession is allowed;
In case of a company, transfer of ownership is allowed only when the project is at least 50% complete;
A new partner can be admitted in the project; however, that new partner will not be entitled to claim immunity.
The purpose of these conditions is to avoid the chances of abuse of concessions laid down under the law. The restriction in the change in ownership is restricted only with reference to case falling under immunity from enquiry under Section 111 of the Income Tax Ordinance, 2001.
Public Office Holders
This immunity is not available to public office holder as were identified in the Asset Declaration law.
Copyright Business Recorder, 2021
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