Unbuilding another tax dream

There is nothing more disappointing or anti-climactic than an unmet tax target or a shortfall of revenue. It represents both a failure of will and circumstance. The expected withdrawal of a special income tax regime that was extended to builders and land developers in the previous budget, as reported in this paper, may be construed as such and more. The decision may be taken in the wake of a remarkable revenue drop in the construction sector from a meagre Rs112 million against official annual estimates of Rs8 billion that fuelled plenty of speculation owing to the sheer scale of difference. Tax officials had been counting on builders and land developers paying at least Rs28 billion in income tax under the new final tax regime in fiscal year 2016-17. Now that the bubble has burst, the Federal Board of Revenue (FBR) might be scratching its head in disbelief and desperation. What it needs to do perhaps is determine the reasons why only Rs112 million could be raised from the effort, especially when a sum of Rs2.6 billion was generated by builders and land developers under the old tax regime in the fiscal year 2015-16. There is sufficient time to do so — before the prime minister sanctions the proposal to switch back to the old tax regime for the construction sector.

Over the years, we have seen a huge imbalance between the tax contributions of builders and land developers and their investments and profits. Under an arrangement with the Association of Builders and Developers of Pakistan (ABAD), the revenue body had introduced the special regime and introduced a fixed tax on the basis of unit area. The average rate of tax on builders of all categories came to Rs33 per square foot — not overly difficult or unfair considering the profits accrued by the builders. They were required to pay Rs14 billion in revenue in 2016-17 while real-estate developers were required to pay another Rs14 billion. It is surprising that though the FBR had decided to recover the taxes through the association’s representatives and by activating the inland revenue chief commissioner under the new regime, builders managed to pay only Rs74 million in income tax on new schemes while land developers’ contribution did not exceed Rs38 million.

Published in The Express Tribune, May 4^th, 2017.

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