IMF dismisses proposal of tax relief for builders

Global lender urges Pakistan to bring equity in distorted tax system

Shahbaz Rana December 04, 2019
The proposal included major concessions to the builders and developers on account of source of equity investment, exemption from computer balloting for income tax audit and exemption from production of record. PHOTO: FILE

ISLAMABAD: The International Monetary Fund (IMF) has shot down Pakistan’s proposal to introduce a special income tax regime for builders and developers and urged the authorities to bring equity in the distorted tax system.

The government shared a draft of the presidential ordinance with the IMF in the recently held talks aimed at treating the builders and developers of housing societies under a special tax regime, said sources in the Ministry of Finance and Revenue.

One of the purposes of offering huge tax incentives to the realty sector was to incentivise the construction industry that had badly suffered due to the ongoing drive of documenting the economy and slow pace of economic growth.

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Sources said the IMF objected to the proposal on the grounds that it would further distort the income tax regime. It was of the view that a fixed income tax regime would put those people at a disadvantage who would sustain losses.

Over a period of time, many distortions have been created in the tax system to appease the wealthy people. The existing income tax regime could not be called equitable and the Pakistan Tehreek-e-Insaf (PTI) government wanted to distort it further.

IMF Resident Representative Teresa Daban Sanchez did not directly respond to the question about its decision to shoot down the proposal.

Various lobbyists were also putting pressure on the Federal Board of Revenue (FBR) to offer special treatment to the builders and developers. The FBR had prepared a draft ordinance in consultation with all these stakeholders.

The proposal included major concessions to the builders and developers on account of source of equity investment, exemption from computer balloting for income tax audit and exemption from the production of record.

Initially, the FBR tried to give these exemptions through the Builders and Developers Special Procedures Rules 2019. However, legal complications arose as the FBR wanted to issue the rules under Section 99C of the Income Tax Ordinance 2001.

The basic idea behind Section 99C was to simplify the income tax regime for certain businesses and groups and it does not give powers to the FBR for bringing substantial changes to the law.

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“We had received a proposal from the Association of Builders and Developers (ABAD) about the special income tax regime but now we have dropped it,” confirmed FBR spokesman and Member Inland Revenue Policy Dr Hamid Atiq Sarwar.

Sarwar said the FBR would ensure ease of business for the builders and developers while remaining within the existing tax regime. He said the FBR was going to set up three dedicated units in Lahore, Islamabad and Karachi tax offices that would solely deal with the tax cases of builders and developers.

Another FBR official told The Express Tribune that around 10,500 cases of builders and developers would be handed over to these three jurisdictions that would help in addressing some of the complaints of the builders and developers.

The setting up of special units may remove some administrative obstacles but it cannot be called a substitute to what the PTI government had planned to offer to the builders and developers.

The government had proposed that the source of self-invested equity for any earlier year would be accepted, which was a major concession.

Also, it proposed that no action would be taken prior to the approval of a committee constituted by the FBR consisting of three persons including a representative of the builders or developers, including actions on account of any definite information, as laid down under sub-section eight of Section 122 of the ordinance.

In order to document the real estate sector, the government reduced the withholding tax rates for the buyers and sellers of properties. It reduced the withholding tax to just 1% on the purchase of properties but linked the percentage with the fair market value instead of the so-called DC valuation rates.

This has helped increase tax collection despite a significant reduction in tax rates. From July through November of the current fiscal year, the FBR collected Rs14.6 billion from the sellers and buyers of properties, which were higher by Rs8 billion or 122.4% year-on-year.

In first five months of the current fiscal year, the FBR collected Rs3.2 billion from the sellers of properties, which were higher by 52% or Rs1.1 billion, according to the FBR’s statistics. Similarly, the FBR collected Rs11.4 billion from the property purchasers, higher by Rs7 billion or 155%.

The federal government was also in negotiations with the provinces aimed at convincing the federating units to cut stamp duties on the registration of properties.

Published in The Express Tribune, December 4th, 2019.

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