ISLAMABAD: The federal cabinet has approved an incentive package for the construction industry after making amendment in the Income Tax Ordinance, 2001, which allows people to invest in the sector without disclosing their source of income.
Importantly, the incentive package has fulfilled the longstanding demand of builders and developers for fixed income tax and declaration of construction sector as an industry. With the declaration of the construction sector as an industry, the import of plants and machinery used in this sector would have the same incentives as enjoyed by other industries.
The cabinet approved the package for the revival of the construction industry and providing employment to the labour class amid the current coronavirus (Covid-19) situation in line with Prime Minister Imran Khan’s vision.
Builders ready to initiate new projects worth Rs1tr
Critics, however, had termed the package a tax amnesty scheme as well as a chance to invest black money in the realty sector when the prime minister had made the announcement in this regard in the first week of April. Before coming to power, they had said, Imran was a staunch opponent of giving tax amnesties.
According to the package, the fixed tax regime would be enforced where taxes are based on per square feet/yard, zero withholding tax on all material except cement and steel, exemption of tax on services and facility of 10 times credit on income and profit for which tax has been paid.
The tax ratio on low-cost housing units to be build Naya Pakistan Housing and Development Authority has been reduced by up to 90%. This regime would be applicable on projects initiated before December 31, 2020, and the current incomplete projects that are registered under this scheme.
The new projects would have to be registered on FBR’s IRIS portal while existing projects would self-declare the percentage of completion and shall pay fixed tax for the remaining project under the new fixed tax scheme. The law states that dividends paid to shareholders would be exempted from taxes.
Under this package, provisions of Section 111 (unexplained income source) of the Income Tax Ordinance, 2001, will not be applicable on capital investments on land and cash if the cash investment is deposited in a new bank account on or before December 31, 2020, and if the investor has legal ownership title of the land at the time of promulgation of this scheme.
Exemption from Section 111 will only be provided for projects that are commenced by December 31, 2020, and completed till September 30, 2022. A project will only be considered to be completed only if the builder has completed the grey structure till September 30, 2022, and the developer has completed landscaping by that time, and constructed 50% sub-grade level roads on the project site. Exemption from Section 111 would be applicable for the developers only if 50% of plots for sale have been booked and up to 40% payments received till September 30, 2022.
The companies and Association of Persons (AOPs) can also claim exemption from Section 111 with conditions, including registration of a new company or AOPs as well as capital investment in land before Dec 31, 2020, and cash transactions through “crossed banking instrument”.
First time owners are also exempted from Section 111, if they purchase a building project through crossed banking instrument before September 30, 2022. Moreover, intending buyers of plots who wish to construct could also claim exemption only if they have paid full amount of plot through crossed banking instrument till Dec 31, 2020, and if construction on such plot begins by December 31, 2020, and is completed by September 30, 2022.
However, public office holders, their benamidar, spouse and dependents cannot claim exemptions. Moreover, listed companies and real estate investment trusts also cannot claim exemption. The amendments also state that exemptions cannot be claimed for investments earned through criminal proceeds, money laundering, extortion and/or terror financing.
One-time exemption on Capital Gains Tax has been granted for a residential house measuring 500 square yards or less and/or in case of a flat of 4,000 square feet or less.
Advance tax on sale of property has also been reduced from 10% to 5%. Through amendment in the Finance Act, 1989, exemption has been provided within the premises of Islamabad Capital Territory for capital value tax, as recently announced by Punjab and Khyber-Pakhtunkhwa.