Exemptions under construction package critically examined

The government will not inquire about the source of any amount declared in the wealth statement, which is invested in the purchase of land and construction of any structure on such land; construction of any structure on already owned land or first purchase of newly-constructed property.
Explaining and critically examining the construction package, Member Tax Reform Commission and renowned tax expert Ashfaq Tola stated that the said exemption will be applicable only for amounts invested during period from passing of proposed legislation till June 30, 2022.
The exemption from application of 111 of Income Tax Ordinance 2001 is also proposed, i.e. source of any amount declared in the wealth statement will not be inquired, which is invested in the above mentioned projects.
This means that amounts invested in purchase of just land will not be qualified for the exemption unless any structure is built on the same.
Moreover, exemption is limited to only amounts invested in first purchase of newly-constructed property and the same is not available in case of subsequent purchases.
However, this needs to be clarified whether first purchase should be from approved builders only or from any ordinary person.
He stated that the Tax Regime for builders and developers will be changed from normal to a fixed tax regime.
The regime was also implemented earlier under section 7C and 7D of Income Tax Ordinance, 2001 ("ITO") for projects undertaken and approved during tax year 2017 only.
It is expected that these sections will be amended to continue the fixed tax regime for upcoming projects also.
The income will be treated as a separate block of income and tax will be levied on fixed basis.
Tax will be levied on per square foot basis for builders and on per square yard basis for developers.
According to the analysis of the package by Ashfaq Tola, the payments for goods and services provided to builders and developers will not attract tax deduction under Section 153 of the ITO.
However, this exemption will not be applicable to companies and steel and cement providers. For instance, an individual or AOP providing steel and cement will not be exempted from tax deduction.
Similarly, a company providing any material or services will also not be exempt from deduction of tax.
Ashfaq Tola explained that the builders and developers will be allowed to declare wealth amounting to 10 times of the tax paid as imputable income. For instance, a builder paying tax amounting to Rs100,000 will be eligible to declare Rs1,000,000 in his wealth.
For the low-cost projects developed by the NAPHDA, the tax rates levied will be reduced by 90 percent.
For instance, in case tax is levied at Rs200 per square feet for the builders, if the same builder is operating under NAPHDA, tax rate will Rs20 per square feet.
The tax expert stated that the holding period for constructed property will be brought to three years, i.e. the period prevailing prior to July 01, 2019. Whereas, holding period for open plots will remain same i.e. eight years, however, the rates of capital gain tax may be reduced on scale down from fourth year onwards.
According to him, the rate of capital gain tax will be reduced in proportion to increase in valuation tables also. Fresh revaluation process of real state will be expedited and sales tax and Federal Excise Duty on construction material will be suitably reduced. The construction, purchase and sale of first house will be exempted from all taxes, including capital gain tax.
About the proposed tax measures by Provincial Revenue Authorities, Ashfaq Tola specified that the sales tax on builders and developers will be levied at Rs. 50/Sq.Ft and Rs. 100/Sq.Yard, respectively, by all provinces and ICT. In case builders and developers are chargeable to sales tax as above, construction services provided to them will be exempt from any sales tax. the low cost housing by NAPHDA or provincial housing authorities will be completely exempted from sales tax.
All Provincial and Municipal taxes, duties, fees, levies, charges on transfer and registration of urban properties to be clubbed under one head and charged at the rate of 2 percent of valuation, he explained.
The tax expert highlighted that the policy on high rise construction has already been approved by prime minster and notification of same has been issued for Islamabad Capital Territory.
However, the same has yet not been issued for other major cities/urban areas. A suo moto case is also pending with respect to high rise constructions. The same should also be considered while framing the law.
Prime Minister has approved status of industry for construction sector. Preferably a 6% interest rate will be offered for hosing mortgage of 100,000 low cost housing units under NAPHDA.
With respect to collection of fixed tax on area basis, it has not been made clear whether such tax will be collected during first year of the project or on the basis of percentage of completion or on some other basis. For example, in case a 100,000 square feet project is undertaken by a builder which will be completed in two years and tax rate is fixed at Rs. 200/ square feet, will the builder deposit complete tax of Rs. 20,000,000 in the first year or will he deposit 50% in first year and 50% in second year, etc, tax expert questioned.
As per rules applicable in earlier regime, commissioner was empowered to issue schedule of payments on four-monthly installment basis.
The tax expert was of the view that the payments to companies by builders and developers for provision of goods and services has not been exempted from deduction of tax under section 153 of ITO. Such exclusion from exemption is neither rational nor logical as the corporate sector is the organized sector of the economy which properly files returns and pay their due taxes on time. Excluding the corporate sector from this relief is equivalent to encouraging undocumented economy in the country. The exemption from withholding tax should also be extended to down stream sectors like distributors of raw materials, according to tax expert's interpretation.
He stated that a suo motu case is also pending with respect to high rise constructions in mega cities. Mega city of Lahore has been cleared for such mega projects. Similar clearance should also be provided to mega city of Sindh, i.e. Karachi. The implications of the case should also be considered while framing the law.
Tola was of the view that the exemption from application of section 111 of ITO with respect to investments in construction may attract negative implications on Pakistan's Progress report for removal from Financial Action Task Force's grey list. This incentive may be misused for parking and laundering of black money.
Moreover, the incentive is framed in a way not to encourage trading of open plots and files as there is a precondition of building a structure on such plot. However, since there is no minimum limit prescribed for such construction, incentive will be claimed by investment in open plot and building a fictitious minimal structure thereon.
For mortgage of 100,000 low cost units at 70% financing, SBP will be required to issue debt of Rs. 210 billion (given average cost per house at Rs. 3 million) to commercial banks. Moreover, these housing colonies will be developed in city outskirts for which government will have to further invest for Hospitals, Schools, Parks, road transportations etc. This will further add to the debt to be issued by SBP.
At the rate of 70% financing and 6% mortgage rate for a tenure of 10 years, monthly installment for the resident comes out to be Rs. 23,314. The project is for low income family whose combined monthly income would be around Rs. 50,000 per month. Normally mortgaging banks in Pakistan provide the facility only when monthly rental is less than 40% of take home income. However, in above case, rental is more than 46% of take home income. This means that for the target resident, payment of monthly rental will not be possible. Therefore, either the interest rate should further be reduced or Government will end up providing further subsidy to these houses.
The time duration provided for exemption from section 111 of ITO is too short as a normal project takes at least 5 to 7 years to be completed, therefore, the proposed expiry date of 30th June, 2022 should be extended.
It needs to be clarified whether the persons, who have pending cases under Anti money laundering and Benami properties laws, will also be eligible to take benefit of the package, Ashfaq Tola added.