The Federal Board of Revenue (FBR) strongly opposes proposals to grant incentives in the form of tax concessions/exemptions for the housing finance as such favours would not be considered a driving force to inspire financial institutions to extend finances to the housing sector.
Sources told Business Recorder here on Friday that the issue of tax incentives to the housing finance was discussed during a meeting on the housing sector held at Finance Division and chaired by Secretary Ministry of Finance. According to the sources, the representatives of the FBR informed that as per policy measures, fresh exemptions are not being allowed. Rather the existing exemptions which are causing huge tax evasion are being phased out effectively.
State Bank of Pakistan (SBP) reportedly informed the meeting that currently total allocation for housing sector is around Rs 2 billion and it was proposed to be raised to Rs 52 billion. Responding to this, the representatives of FBR explained that if funds allocation is Rs 52 billion then mark-up as proposed to be charged from this sector is @ 10 percent, therefore, interest income would be Rs 5.2 billion. Based on the current trend of markup cost on fixed deposits and long term deposits is around 7 percent. Therefore, markup to these costs would be Rs 3.64 billion, so net interest income would come to around 1.56 billion. If administrative cost as per current trend is taken at 25 percent of the net-interest income, it would be 0.390 billion. Therefore, net accounting income of the banks/financial institutions from allocation of Rs 52 billion would be Rs 1.2 billion. The effective tax rate in case of banking companies is as low as around 8% (accounting income less provision as per prudential regulation and accounting depreciation less tax depreciation is equal to taxable income which is divided into business income taxable @ 35 percent dividend and capital gain income tax at reduced rate or exempt).
Therefore, effective tax is around 8 percent of the accounted income. Hence in case of bank, the tax benefit is only 0.096 billion and if 10 banks are involved in the financing the benefit would be Rs 0.0096 billion. Therefore, the question arises that whether banks would invest in this kind of business because of such a meagre tax incentive. The logical conclusion would be a big no. Therefore, FBR is of the view that the incentive demanded would not be a driving force to motivate financial institutions to extend finances towards housing sector. Besides, all incentives which are given in such a manner are subject to misuse. All those sector which have been given incentives of a similar nature in past did not become revenue contributors to the national economy. Moreover, as per policy of the Government, fresh exemptions are not being allowed. Rather the existing exemptions which are causing huge tax expenditure are being phased out and withdrawn.
Representatives of FBR added that the proposal of tax incentives/concessions was also not a viable option and would not be a driving force for motivating builders and developers to get involved into an affordable housing project. As huge funds are required for the project and it may be spent in 2 to 3 years resulting in assessment of income of Construction Company on provisional basis till the finalisation of the project. This will result in gross profit of only around 10 percent and net profit to be less than 10 percent in case of the ongoing project. Therefore, 25 percent of that 1 percent cannot be a motivating factor for builders to get attracted to affordable housing project, sources added.
Earlier, it was proposed that keeping in view the critical nature of housing builders/developers in the development of housing sector in Pakistan; the Government may provide income tax exemption/tax incentive on income derived from affordable housing projects. The role of financial institutions is of utmost importance as they act as funding avenues for not only individuals but for housing builders/developers as well.
In case to motivate financial institutions to extend finance towards housing sector, it is suggested that income tax relaxation may be provided to these institutions with respect to the income derived from long term finance for housing projects.
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