The big property developers and builders who are making billions of rupees but paying peanuts in income tax may start contributing some extra money from the next financial year, as the government is considering amending the Income Tax law to introduce a special tax regime for them.
Sources in Federal Board of Revenue said that the authorities might propose to the Parliament approval of a special tax regime for the land builders and developers from the new fiscal year 2016-17, beginning from July this year.
Under the proposal, the builders may be required to pay a fixed income tax on each square feet of land that they would develop and sell. According to the budget proposal, which has yet to be vetted by Finance Minister Ishaq Dar, the authorities want to divide the builders and developers in three broad categories.
The builders and developers selling up to 750 square feet of developed land may be asked to pay a fixed tax of Rs20 per square feet. For the category of 751 square feet to 1500 square feet, the proposed rate is Rs40 per square feet. For the last category of over 1,500 square feet, the government may propose to fix the rate at Rs70 per square feet.
The proposal may partly increase tax collection but it would not address the fundamental issue of collecting the income tax as per the real earnings of the people. Probably this is the reason, the Association of Builders and Developers (ABAD) is willing to accept the new regime, the sources said. They added the association has already agreed to the proposal.
The investment in real estate and construction has become a major source of hiding incomes in Pakistan, according to the tax experts. The FBR has so far remained unable to catch this untaxed sector and one of the reasons is the presence of corrupt elements in the tax machinery.
The section 113A of the Income Tax Ordinance of 2001 deals with income tax affairs of the builders while section 113B is related to the land developers. According to the FBR statistics, in the last fiscal year 2014-15, the builders paid a paltry sum of Rs23.2 million in taxes, as the collection was constantly nose diving for the last four years.
Similarly, the developers also paid just Rs8.7 million in figures. Both the heads do not reflect the otherwise booming construction and real estate sectors.
The actual problem is the understatement of income and no special tax regime would address this issue, said Dr Ikram ul Haq – one of the leading independent tax experts of the country. He said the minimum and final tax regimes – the two among many categories of special regimes – have distorted the spirit of the Income Tax Law.
History
In what would be the guiding force for the budget proposal, the Tax Reforms Commission (TRC) highlighted concerns of almost no tax collection from the builders and developers in a rather recent report.
The TRC, in its final report to the government, suggested that the FBR should put in place effective laws to move against property investments and speculations.
The TRC has expressed concerns as to why the tax rates for Section 113A and 113B have not been prescribed by the FBR since the past two years. It has recommended that rules for the sections 113A and 113 B should be announced in this budget.
The TRC has also proposed tax rates for land developers and builders, which are partly higher than what the government intends to implement from the new budget.
The TRC has proposed that the government should charge turnover tax at the rate of 5% from the builders as a minimum tax on the income or it should charge from Rs200 per square yard to Rs500 per square yard (Rs22-56 per square feet) from them, depending upon their categories.
For the developers, the TRC has proposed minimum tax at the rate of 5% on the gross turnover of the land developed or Rs500 per square yard.
