One lucky break the government got in reviving the economy due to covid-19 is getting permission from the IMF on introducing a construction amnesty scheme and fixed tax regime (FTR). The scheme was supposed to expire yesterday. But the builders and developers’ community wanted some extension. They got it. Yesterday, the PM announced the extension of no-questions-asked on the source of income (Section 111) by six months to end on 30th June 2021. The FTR is extended for 12 months - till the end of 2021.
The scheme came in midst of the pandemic and the time period was short given the long approval processes where provinces, federal and other regulatory bodies are involved. The process was expedited by October. To date, Rs186 billion worth of projects are registered with the FBR – a higher amount is in draft and approval stages. According to ABAD, a much higher number of projects have the potential to come in the next six months – mainly in Sindh; they claim that the overall worth of investment under this scheme can approach a trillion-rupee mark.
One of the big impediments in the building construction industry – especially for high-rise, is the approval process. There are multiple provincial and federal bodies involved – from building control authorities to utility companies to civil aviation authority. And everyone used to take its sweet time. Some approvals don’t move an inch without greasing; while other bureaucratic delays were unbelievably long. Now some issues are resolved; but ample time has been wasted, and that is why some think that the extension was necessary.
The bigger problem was in Sindh. As in rest of the three provinces, federal government’s push was enough to move the wheels. But big money is in Karachi and numerous projects are to be hosted here. The approval time from civil aviation and air force has finally now reduced from months to days (if not instant in cases where already high rise exists).
Then the Sindh development agencies resisted the online and digital portals for obvious reasons. There was no political push as the Sindh government is not on the same page as federal. In the start, a few projects were pushed by NAPHDA which were approved while the remaining are still pending.
There are two distinct features of the construction scheme. One is the amnesty scheme where no questions are being asked about the source and the approval processes have to completed in 2020 and the construction has to be completed by September 2022. This got 6-months extension.
The other element of the package is FTR. The tax is fixed based on per square feet construction and the rate varies with the size of the unit. The ten times income of the amount paid as fixed tax is clear and documented. If the project income is higher than 10 times of the tax paid, for the remaining income, normal income tax of 29 percent is being applied.
The FTR is applied for the very reason to document the builders and developers’ income by simplifying and lowering the taxes. But the rates are kept too low. The actual income in projects is much higher than 10 times of FTR limit. Usually, the project income is 20-30 times of fixed tax to be deducted. With full tax rate of remaining income, the builder would not show that income, and that amount would remain undocumented. That defeats the purpose of full documentation.
The thinking is to reduce the income tax on amount not covered in FTR at 15 percent to lure builders to fully document it. Some would pay while others still want to save that 15 percent. The other option could be to increase the FTR rate to have adequate tax on the full income. The government should think of increasing the rate of FTR to have adequate tax on builders’ income. They are getting a free pass on the already earned undocumented income. That should stop.
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