ISLAMABAD: The Pakistan Tehreek-e-Insaf (PTI) government has quietly given another perpetual tax amnesty to the realty sector in the budget by allowing it to legalise tax-evaded money at just 4% of the property value.
The new tax amnesty is hidden in the 10th Schedule of the proposed Finance Bill 2019 which, in its current form, allows real estate investors to pay 4% of the transaction value in taxes, keep the source of investment secret and remain outside of the tax net, showed the Finance Bill 2019.
The original idea of the 10th Schedule is said to be very noble – end the tax evasion culture and bring people into the tax net by ending the concept of non-filers of income tax returns.
The unannounced tax amnesty, overall second by Prime Minister Imran Khan, will allow realty-sector investors to save Rs660 million on Rs1 billion worth of property due to the 10th Schedule, according to sources in the Federal Board of Revenue (FBR).
PM Imran’s first tax amnesty scheme will end on June 30, but it has failed to yield desired results. As of Tuesday, less than 250 people had opted for the first tax amnesty scheme.
Before the insertion of the 10th Schedule, the concealed income was to be charged at 100% of the maximum rate of due taxes. This means at 35% maximum income tax, the property buyer would have been penalised with a total penalty of Rs700 million on Rs1 billion worth of investment.
Now, he will pay Rs40 million only and the FBR will be barred from questioning the source of income on the basis of the 10th Schedule.
Rule 2 of the 10th Schedule states, “in making the provisional assessment under sub-rule (1), the commissioner shall impute taxable income on the amount of tax deducted or collected under rule 1 by treating the imputed income as concealed income for the purpose of clause (d) of sub-section 1 of Section 111.”
The deducted tax in case of property will be 2% and after adding 100% penalty, the total liability will be just 4%, according to the 10th Schedule.
Clause (d) of sub-section 1 of Section 111 states, if “any person has concealed income or furnished inaccurate particulars of income …. and the person offers no explanation about the nature and source of the amount, the amount shall be included in the person’s income chargeable to tax under the head ‘income from other sources’ to the extent it is not adequately explained.”
But the government has also proposed that Section 111 (d) would not apply to those who would fall in the 10th Schedule.
Now, instead of the amount of investment, the deducted tax will become the base for imposing 100% penalty, according to an independent tax lawyer.
As per Rule 2 of the 10th Schedule, the income tax commissioner will impute the taxable income on the amount of tax deducted or credited under Rule 1. The commissioner will serve him a notice and if the person does not respond to the notice within 45 days, his 4% total tax liability will be treated as final tax assessment.
This means he would pay a total 4% tax including 100% penalty – down from 70% in the pre-10th Schedule scenario.
When contacted, FBR spokesman Dr Hamid Atiq Sarwar said if there was any confusion in the proposed bill which gave impression of a tax amnesty scheme for the real estate sector, the government could still amend the bill before it was passed by the National Assembly.
Sarwar said although in the present shape, Section 111 (d) would not apply, the FBR could still assess the income of a person under Section 122 (5) if it got information from other sources.
Another advantage that realty-sector investors will get is that they will be immune from any investigation into the amount they invest in property due to the final tax assessment of only 4%, according to the sources.
The issue of perpetual tax amnesty had been thoroughly discussed at the time of budget at the top management level, sources in the FBR told The Express Tribune. But it was then decided that the proposed schedule should not be changed.
Unlike the realty sector, in case of interest income of a widow, the non-ATL person would pay 30% income tax under the 10th Schedule. And if the widow does not come in the tax net and does not declare the source of investment, she would be penalised with 100% penalty.
This means that the widow’s tax liability will be 60% of the value of investment against only 4% for the realty-sector investor.
It seems the government has given perpetual new tax amnesty in lieu of Section 236W real estate amnesty that had come on the radar of the Financial Action Task Force (FATF), according to the sources. Section 236W amnesty was at the rate of 3%.
There is another legal deficiency in the proposed 10th Schedule. In case a non-NTN person undertakes a property transaction, but subsequently files income tax return, he would be excluded from the ambit of the 10th schedule. In this scenario, his unexplained income can be taxed at maximum penalties, which is 70%.
Published in The Express Tribune, June 22nd, 2019.