How developers, builders will make it costlier to live

New budget sees fresh taxation, burden to be passed onto consumers

KARACHI: The announcement of the upcoming budget is around the corner and although the Pakistan Muslim League (PML-N) government will be presenting their fourth budget this time, they have miserably failed in improving the taxation system.

The only effort the government has made consists of a few cosmetic changes to the system.



The latest example of it has surfaced in the shape of a new understanding reached between the Federal Board of Revenue (FBR) and the Association of Builders and Developers of Pakistan (ABAD) – an association of over 700 builders and developers – to pay taxes.

The two entities have recently agreed on a new tax regime under which the builders and developers are ‘happy’ to pay taxes. The new proposals will be part of the upcoming budget 2016-17.

Interestingly enough, these are the same tax suggestions made by the same government that ABAD rejected just three years ago.

What is it that has changed

Experts say the new tax measures will partly help the government, but the FBR will never be able to judge the real income or collect complete taxes from builders and developers despite implementing the new regime.



According to the agreement, there will be three categories of builders and developers for taxation: Category A for Karachi, Lahore and Islamabad; Category B for Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad and Quetta; and Category C for all other urban areas not specified in the first two categories.

For residential buildings and offices, builders falling under Category A would pay Rs20 per square foot for an area of up to 750 square feet, Rs40 for 751-1,500 square feet and Rs70 for 1,501 square feet and above. The rates would be Rs15, Rs35 and Rs55 for Category B, and Rs10, Rs25 and Rs35 for Category C, respectively.

The construction and real estate sectors have seen a record growth in recent years; however, they have not been paying even a fraction of its due share in taxes.

The new regime is expected to generate a reasonable amount of Rs25 billion, though experts say it would still be too little of what could be generated by the sector.

In the last fiscal year 2014-15, the builders paid an insignificant amount in Rs23.2 million in taxes, a figure that has been continuously declining for the last four years. Similarly, the developers also paid just Rs8.7 million in figures, according to the FBR statistics.



“This is painful for me. Nobody will be willing to pay complete taxes if the FBR starts giving relaxation to people and sectors like these. The biggest problem for such taxes is that they do not fall in the category of income tax; you can call it capacity tax but not income tax,” Dr Ikramul Haq, a renowned tax consultant, told The Express Tribune.

For commercial buildings, the tax rate would be Rs210 per square foot for all the categories. Similarly, land developers falling under Category A would pay Rs20 per square yard for an area of up to 750 square yards, Rs40 for 121-200 and Rs70 for 201 square yards and above for residential plots. The tax rates for the respective slabs would be Rs15, Rs35 and Rs55 for Category B, and Rs10, Rs25 and Rs35 for the Category C. A tax of Rs210 per square yard has been proposed for commercial plots falling under all the categories.

The builders and developers are happy with the proposed arrangement because they will easily pass on the new taxes to the end customers and this is not unusual as many other industries also pass on the burden of taxes to consumers.

What is different in this case is that the tax authorities will never be collecting these taxes on the final income of the builder or developer.

“I am sure the FBR has not done any study. It is just a shot in the dark. This is a predetermined tax; the FBR will not be able to know the actual net profit of builders at the end,” added Haq. Meanwhile, ABAD Chairman Hanif Gohar, while talking to The Express Tribune, acknowledged the fact that the tax would be passed on to the consumers.

“We are happy because this is how we will come under the tax net with some peace of mind. From now on, builders and developers will not be maintaining two books for the fear of tax authorities,” he added.

The writer is a staff correspondent

Published in The Express Tribune, May 30^th, 2016.

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