Tax expert advocates escrow accounts for developers, builders

The government should allow developers and builders to deposit project investment money in the escrow accounts instead of bank accounts to claim exemptions from probing source of investment under section 111 of the Income Tax Ordinance 2001.

According to the legal viewpoint of Ashfaq Tola on the Ordinance promulgated for construction sector, the said amounts may only be drawn from the escrow account only after certain verifications. The condition of depositing of monies into any normal bank account may be exploited as amounts may be withdrawn in the name of expenditures which would not be incurred for the projects or the amounts withdrawn may be exaggerated as compared to actual expenditures.

Moreover, developers and builders do expenditures on project with money of first purchasers of these projects who make bookings by paying advances and subsequent installments.

Tola stated that the fixed tax rates specified are much lower as compared to other sectors. These tax rates are even lower than the minimum turnover tax rates of 1.5% applicable on other sectors. For example, constructed commercial property in Karachi is valued at an average of Rs. 25,000 per square feet, whereas, tax rates specified are Rs. 250 per square feet, which is merely 1% of market value (Rs. 25,000/Rs. 250). Moreover, even these taxes will be built into costs by builders and developers. These rates need to be considered for revision after taking into account their fair market values.

Although the completion of a builder project is linked with completion of grey structure, the time period of 2.5 years for each project is still unreasonable. This time period should be extended to at least 3.5 years. Similarly, the expiry date of registration of projects and completion of projects should also be extended, accordingly till 30th June 2021 and 31st December 2023, respectively, he explained.

It is mentioned that persons involved in tax evasion will also be allowed exemption from Section 111. However, it is not mentioned that whether cases already pending with the FBR or the respective appellate authorities are covered in the exemption or not.

The payments to companies by builders and developers for provision of goods and services have not been exempted from deduction of tax under section 153 of Income Tax Ordinance. Such an exclusion from the aforesaid exemption is neither rational nor logical. This is because the corporate sector is an organized sector of the economy which properly files returns and pays its due taxes on time. Excluding the corporate sector from this relief is equivalent to encouraging undocumented economy in the country.

He stated that "it is provided that there shall be no refund of any tax collected or deducted under the Ordinance, whereas, adjustment of taxes paid under Section 236K is allowed. It needs to be clarified whether refunds would also not be allowed in cases where taxes paid under Section 236K exceed tax liability of any builder or developer for the year.

"It is provided that in case of development of plots and construction of buildings on the same plots for low cost housing and all projects developed by NAPHDA, the higher rates shall apply. The rates need clarification as to whether the higher rate per unit of area will be considered or higher total tax amount will be considered. Moreover, it also needs to be clarified whether discount of 90% will also be applicable in above case where development and construction is on same plot in case of low-cost housing.

"It has been provided that a builder and developer is required to file 'wealth statement' along with return of income, whereas, in case of a company or an AOP, the wealth statement is not filed instead a balance sheet is submitted. Only an individual may file wealth statement under section 116 of the Income Tax Ordinance."