ISLAMABAD: Prime Minister Imran Khan on Friday announced tax amnesty scheme for realty sector – the second by his government in less than one year, allowing people to invest their black money in the construction sector without disclosing source of income.
The PTI government has limited the scope of its second amnesty scheme in ten months to only wealthy this time. The immunity from declaring source of income will be available only to builders and developers of the housing societies and projects and this has not been extended to building own homes.
But tax on gains on investment has been waived for all citizens who would want to sell their home.
Currently, the government charges 5% to 20% capital gains tax on sale of constructed assets and open plots. The tax amnesty has been given as part of the Prime Minister Package to lessen impacts of infectious novel coronavirus outbreak on the construction sector.
But it may carry implications in the longer run for Islamabad due to its commitments given to Financial Action Task Force (FATF) and International Monetary Fund (IMF).
“All the people investing in the construction sector this year will not be questioned about their source of income,” announced Prime Minister Imran Khan. Before coming into power, Imran was a staunch opponent of giving tax amnesties.
The tax amnesty scheme will be implemented by promulgating a Presidential Ordinance.
“The government has decided to amend section 111 of the Income Tax Ordinance to allow people invest their black money in construction sector,” said a senior official of the Federal Board of Revenue (FBR).
The FBR was resisting the idea of giving tax amnesty scheme and charge the construction sector at fixed income tax rates – two concessions that will further distort Pakistan’s highly distorted taxation regime.
“The tax rate will be fixed for the construction sector, and constructors will be charged tax per square foot or square yard,” said the premier. A salaried person is bound to pay up to 35% of its gross income as tax while under the fixed tax regime a textile mill owner pays only 1% of his gross exports as tax.
The prime minister also announced to exempt the construction sector from regular income tax regime and said the sector would be charged at fixed rates. This facility is also against the norms of taxing people on the basis their real income.
“The authorities have committed to not granting further tax amnesties [continuous structural benchmark],” says an agreement between Pakistan and the IMF.
The IMF had barred Pakistan from giving further tax amnesty scheme during the currency of the IMF programme after the PTI government gave a tax amnesty scheme in May last year to allow people to declare their ill-gotten and black money.
The sources in the Ministry of Finance told The Express Tribune that the government has exploited the coronavirus opportunity to accommodate influential people who were pressurizing it to give tax amnesty to the realty sector for past many months.
They said there was expectation that the IMF would not create much trouble due to ongoing adverse implications of the COVID-19 disease on Pakistan’s economy.
Responding to a question regarding implications of the PM’s tax amnesty scheme on the approval of the second review of the programme, the IMF’s Resident Representative in Pakistan Teresa Daban Sanchez said the COVID-19 is posing sizeable challenges to the world economy and to Pakistan.
In Pakistan, one of the challenges is a large negative impact on daily wage workers. In this context, IMF’s advice to Pakistan as well as to other member countries is to implement policy actions that are targeted, temporary and focused on providing support to the most vulnerable segments of the population.
It is not yet clear how the FATF will react to the decision. The FATF has already declared the real estate sector as high risk area for money laundering. In February, the FATF gave four months deadline to Pakistan to complete its 27-point action plan.
The Ministry of Finance’s version could not be obtained. The sources said the builders and developers will be required to declare their projects before end of December 2020 in addition to getting approvals for starting the schemes.
They may have to get registered sole-purpose company to avail the tax amnesty scheme.
Imran Khan also announced to elevate the status of the construction sector to that of an industry. He said a board will also be formed to address all issues and matters related to the construction industry.
The PM said all industries that are connected to construction will continue to function even during the lockdown. He said the reason he was paying attention to the construction sector is that it generates jobs for daily wage workers, many of whom have lost their income due to the ongoing lockdown.
People carrying out construction in the Naya Pakistan Housing Scheme for the poor will only have to pay 10 per cent of the fixed tax. Withholding tax will be waived for all construction sectors except the formal sectors of steel and cement, said the prime minister.
The government would exempt purchases of goods and services for construction purposes from withholding taxes that are currently charged under section 153 of the Income Tax Ordinance.
The prime minister said the sales tax will be reduced in coordination with provinces and a subsidy of Rs30 billion to be given for the Naya Pakistan Housing Scheme. He said the government aims to "find a balance" between continuing a lockdown and avoiding unemployment.
“In Pakistan, we have corona on one hand and poverty on the other,” he added, “you cannot lock up 220 million people”. The premier expressed concerns that if the lockdown continued for a long time, people would become “desperate and come out on the streets”.
Meanwhile, Adviser to the Prime Minister on Finance Dr Hafeez Shaikh chaired a meeting to devise the modalities for the implementation of the fiscal stimulation package.
“The construction industry will become practically operational after April 14 so that the daily wagers who are the most vulnerable of the population shall have work to earn a respectable earning for their families,” Shaikh said.