President Arif Alvi has officially promulgated Tax Laws (Amendment) Ordinance 2020 for the construction industry.
Some of the key features of the Tax Laws (Amendment) Ordinance 2020 for the construction industry, approved by the federal cabinet, include the introduction of a fixed tax regime – based on per square feet and per square yard – for developers and the builders.
Features of the Ordinance are as follows:
- Fixed tax to be charged based on square feet/per square yard.
- No withholding tax on materials for the construction sector except cement and steel.
- Abolition of withholding tax on services.
- Facility for availing 10 times tax credit of profit/gains of the tax paid by the developers/builders.
- 90 percent reduction in taxes for low-cost housing schemes of Naya Pakistan Housing Authority.
- The scheme will be available to projects initiated before December 31, 2020, and existing ongoing projects registered with the scheme.
- New and ongoing projects will be required to be registered on the ‘IRIS’ portal of the Federal Board of Revenue (FBR).
- Ongoing projects should tell about their completion ratio and need to pay taxes for the remaining work under the new fixed tax scheme.
- No tax on payment of dividends to the shareholders by the companies.
- Exemption from capital value tax (CVT) within the jurisdiction of the federal capital on the pattern of Punjab and KPK.
Other main features of the Ordinance include
- Advance tax on the sale of properties has been reduced from 10 percent to 5 percent and plant and machinery imported for construction and land development will enjoy the same facility available to other industries.
- One-time exemption from capital gains on personal residence – 500 square yards for a house and 400 square feet for apartments – has also been given.
- Under the Ordinance, the provisions of Section 111 of the Income Tax Ordinance, 2001 shall not apply to any shareholder or partner of a builder or developer in respect of any amount invested as capital in a builder or developer or land possessed or acquired by the builder or developer, or its partner in case of a limited liability partnership or an association of persons, if the amount is invested as capital or the land is transferred on or before December 31, 2020, in the manner as prescribed and is utilized in a construction or development project in a specified manner.
- Provided, that the exemption from the provisions of Section 111 shall also be available to the first purchaser of newly-constructed buildings of a project if the purchase is made on or before September 30, 2022, in the manner as prescribed.
- The immunity will not be available to the holder of any public office as defined in the Voluntary Declaration of Domestic Asset Act, 2018 or his benamidar as defined in the Benami Transactions (Prohibition) Act, 2017 or his spouse or dependents; or any proceeds derived from the commission of a criminal offense including money laundering; terror financing but excluding offense of tax evasion.
- Listed companies and real estate investment trusts will not be exempted from the provisions of section 111 of the Income Tax Ordinance, 2001.
- The conditions for availing immunity from section 111 by the companies and Association of Persons (AOPs) revealed that the new company or the AOP must be registered before December 31, 2020.
- In case of cash investment, it added, the amount should be transferred to AOP and the company by Dec 31, 2020, through Cross Banking Instrument.
- All money to be invested in projects under this schedule for which an explanation of source is not available with the person investing shall be put in a designated bank account of the person on or before the 31st of December 2020 and subsequently be drawn for investment expenses.
- The government will introduce special provisions relating to the developers and the builders.
- The new provisions will apply to builders and developers opting to be assessed on their income, profits, and gains from projects, which are set up between the date of promulgation of the ordinance and December 31, 2020; and completed on or before September 30, 2022.
- Under the Tax Laws (Amendment) Ordinance, 2020, the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;
- No deduction shall be allowable for any expenditure incurred in deriving the income.
- The amount of the income shall not be reduced by any deductible allowance;
- The set-off of any loss and no tax credit shall be allowed against the tax payable except credit for tax collected from the builder or developer under Section 236K collected after the date of promulgation of the ordinance on purchase of immovable property utilized in an eligible project.
- The income tax exemption will be available on any income chargeable under the head “capital gains” derived by a resident individual from the sale of constructed residential property.
- Provided that exemption under this clause shall apply if, at the time of sale, the residential property was being used for personal accommodation by the individual, his spouse or dependents; the land area of the property does not exceed 500 sq yards in case of a house and 4,000 square feet in case of a flat, and exemption under this clause has not previously been availed by the individual, his spouse or dependents.
- All persons registered under this scheme shall submit the registration form along with the irrevocable option to be assessed under this schedule in respect of each project on the IRIS through the FBR website by December 31, 2020, or within 30 days of setting up of project, whichever is earlier.
- A builder or developer availing this scheme shall electronically file a return of income and wealth statement as may be prescribed accompanied with evidence of payment of due tax, which shall be taken for all purposes of the ordinance to be an assessment order issued to the taxpayer by the commissioner to the extent of income computed under these rules.
- The return and wealth statement filed may be revised without the approval of the commissioner within 60 days, according to the ordinance.
About the withholding of tax, a builder or developer shall not be required to withhold tax under Section 153 of the Ordinance on purchase of building material except steel and cement:
Provided that a builder or developer shall also not be required to withhold tax under Section 153 on services of plumbing, electrification, shuttering and other similar and allied services other than those provided by companies. Under the draft law, a builder or developer shall be allowed to incorporate its profits and gains in its books of accounts, which shall not be more than 10 times the amount of tax paid. In case, the profits and gains of a builder or developer are more than the amount allowed under sub-rule (1), the excess amount shall be chargeable to tax at rates specified in Division-I or Division-II of Part-I of the First Schedule, as the case may be.