New Tax Regime for Builders and Developers
THE HOUSE ORGANIZATION
The House is an association founded on 1st January 2021, to disseminate and advise the information and expertise in financial, corporate, foreign exchange, anti-money-laundering, FATF, and fiscal matters to businesses and the society at large. There is a need for an in-depth analysis of these topics and spreading the same in easy and realistic ways. The organization is located in London, Toronto, and Karachi. For two reasons, the name ‘The Home’ has been adopted. Firstly, wisdom can only be obtained from the House of the Prophet (peace be upon him) and secondly, the organization’s primary aim is to advise a business.
OBJECTIVES OF THE ORGANIZATION
The House organization was set up to provide high-end solutions to medium and large business houses and the general public on corporate, international, fiscal, anti-money laundering, FATF, foreign exchange, and other related issues. It is the organization’s firm conviction that only the entrepreneur can provide strategy and vision for a company. In providing specialized knowledge and expertise on issues not expected to be mastered by the entrepreneur, the position of advisor is minimal.
WHAT IS NEW REGIME?
- This is a tax regime package for individuals participating as builders and developers in the construction industry. This is a time-bound package ending on 30 June 2023. In compliance with this scheme, the revenue, sales, and profits of any construction project resulting from the sale of homes, apartments, commercial or industrial spaces, units, or parcels of such projects shall not be taxed in accordance with standard income tax procedures of the Income Tax Ordinance, 2001.
- Such income, 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 a final tax in all respects. If a company is engaged as a builder or developer the dividend from such income will also be exempt from tax. There is no minimum tax in this case. The time period for the regime is the completion of the project by June 20, 2023.
- 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.
CORE ELEMENTS OF REGIME
There are three core elements of the regime which are:
- Fixed Tax for Builders and Developers
- Immunity from the inquiry for the source of investment by the Builders and
- Immunity from the inquiry for the source of investment for the ‘buyers’ of these
All these aspects have been briefly and generally described in this paragraph. 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 inquiries by the tax officers for their source of investments. Investment in the 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 three components of the package are independent in nature however there is a strategic inter-dependency.
FIXED NON INCOME BASED TAX
- Any income, profit, or gain from a ‘Project’ registered with the Federal Board of Revenue [FBR] by June 30, 2021, will be subject to a fixed tax. The 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. The income, profit 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 ‘builders or developers’. The income, profit, 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 a property built or developed which is used for rental purposes.
- All persons, being individuals, an 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. The 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 is only two conditions to qualify for the regime (i) Project Registration with FBR, (ii)Completion of the project by June 30, 2023.
- Under this regime, the tax liability of the builder or the developer of a project will be determined on the basis of the square feet area of the building or the plot or area developed by that builder or the developer as the cases may be.
- Each project will be accounted for separately. For example in the 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 Rs250 per square foot. 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 Rs10,000 x 250= Rs2.5 million.
- The 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 said Rs.4 million then there will be no tax on that Rs.4 million. Similarly, the dividend out of 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 the tax liability. In the 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 the normal rate 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 a project-to-project basis. If a builder or developer has more than one project each project will be taxed separately.
- 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 life. For example, in the above illustration if the project completion life is two years then Rs.125 per square feet will be payable 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.
IMMUNITY FROM ENQUIRY OF SOURCE OF INVESTMENT IN THE PROJECT
- As an incentive to promote investment in the construction and housing sector this regime provides immunity from the inquiry 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 a penalty equal to the amount of tax. Where the tax law provides an exemption from that inquiry it is called ‘Immunity’. The construction tax regime provides immunity from Section 111 for investments in the projects if registered up to June 30, 2021. This is a very big concession.
- The immunity from sources 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 the repatriation of undisclosed assets held outside Pakistan without tax incidence. Both Pakistan and the person declaring will benefit.
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 of legal heirs and succession is allowed
- In the case of a company transfer of ownership is allowed only when the project is at least 50% complete;
- A new Partner can be admitted to the project however that new Partner will not be entitled to claim immunity.
The purpose of these conditions is to avoid, to the extent possible the chances of abuse of concession laid down under the law. The restriction in the change in ownership is restricted only with reference to a case falling under immunity from inquiry under Section 111 of the Income Tax Ordinance, 2001.