Govt shelves realty sector tax plan
The existing calculations of the capital gains tax have been designed in such a manner that Rs20 million gain from property comes down to hardly Rs5 million, said the sources. PHOTO: FILE
The federal government has quietly shelved a move to tax real estate income as normal business income, which the legal experts say has also deepened a constitutional issue about charging taxes in a manner that violates provincial domain.
The withdrawal of a major tax amendment has also provided a backdoor entry to real estate developers and builders that would not be charged under normal income tax regime even after the expiry of the real estate sector tax amnesty scheme.
In order to discourage highly speculative real estate business and collect taxes according to income levels, the government had proposed an amendment in section 37 of the Income Tax Ordinance to treat gains from the sale and purchase of property as normal business income.
However, the government dropped the amendment the day the national assembly approved the budget. Not only that, it also compromised on a budget proposal that was aimed at collecting taxes from the real estate tycoons under a normal income tax regime.
“For removal of doubt, it is clarified that where a person is habitually engaged in transactions of sale and purchase of immovable property or such sale and purchase is an adventure in the nature of trade and business, the provision of this subsection (37 1A) shall not apply and income from such transactions shall be chargeable under the head income from a business,” according to the amendment that was subsequently withdrawn.
This clause has been omitted in the finance act that the national assembly passed last week despite forcefully defending it during the budget approval process, including in the Senate Standing Committee on Finance. There was discussion within the Federal Board of Revenue (FBR) that various case laws support treating property income as business income, therefore, the FBR decided to withdraw the proposed amendment and instead would now rely on the case laws, said Chaudhry Mohammad Tariq, Member Inland Revenue Policy of the FBR, while defending the decision to withdraw the amendment.
The treatment of immovable property transactions under business income would have required full disclosure and a higher tax bracket, which has once again been avoided, said Dr Ikramul Haq, advocate Supreme Court of Pakistan.
It is another classic case of serving mafia of developers engaged in purchase and sale of properties as their tax will be under section 37 and not section 18 as originally proposed, said Haq. The FBR has failed to collect due taxes or use of the black money in the real estate sector, which is also an area of concern for the Financial Action Task Force.
Haq said that after the 18th Constitution Amendment, the federal government cannot levy income tax, wealth tax, capital value tax, capital gains tax or any sort of tax under any nomenclature in respect of the immovable property. All these subjects are now within the exclusive domain of the provinces, he added.
The sources said that on eve of the budget approval day, the FBR suddenly came under immense pressure from the top to withdraw the tax proposal end any chance to treat income from property as business income. They said that there was also pressure to withdraw the proposal to treat property income under a normal tax regime. The FBR was provided with new rates, which were then added in the Finance Act, said the sources.
The national assembly then approved these rates of 3.5% tax on the gain of up to Rs5 million on the sale of property, 7.5% on gain between Rs5 million to Rs10 million, 10% on gain from Rs10 million to Rs15 million and 15% on above Rs15 million gain while striking a compromise with the real estate sector.
The treatment of massive untaxed property income under the existing law would also allow speculative trade in the real estate sector, which is discouraging construction related activities. This is against the policy of Prime Minister Imran Khan who wants to promote construction activities instead of speculative trade of plots, said the sources.
The existing calculations of the capital gains tax have been designed in such a manner that Rs20 million gain from property comes down to hardly Rs5 million, said the sources.
The withdrawal of the amendment in section 37 in haste manifests how haphazardly the budget was made by the government. A similar episode had happened in the case of granting income tax exemption to Army Welfare Trust where the government first refused to grant an exemption and then did so in an emergency with the help of a retired law ministry officer.
Haq said that the federal government in 2012 had encroached upon the right of the provinces by including immovable property in section 37(5) of the Income Tax Ordinance, 2001. Subsequently, the national assembly accepted the principle and the collection of federal capital value tax (CVT) on transfers of immovable property was abolished from April 17, 2020, through Tax Laws (Amendment) Ordinance 2020.
The deletion of amendment in section 37 would also accommodate those who did not avail section 100 D of the real estate sector amnesty scheme that was for new projects, said Haq. Section 100 D deals with the tax code for the builders and developers. The amnesty scheme has expired on June 30.
The FBR had proposed another amendment in section 113 that deals with minimum income tax to capture the actual income of the realty sector. However, while withdrawing the amendment in section 37 in haste, the FBR forgot to withdraw the amendment in section 113 that is now part of the law.
According to the new amendment “For the removal of doubt, it is clarified that the definition of turnover covers receipts from all business activities in line with expression turnover from all sources used in sub-section (1) including but not limited to receipts from the sale of immovable property where such receipt is taxable under the head Income from Business”.
An official of the FBR said that the section 113 amendment would help the tax machinery to collect due taxes from the big projects that have already been completed.
Published in The Express Tribune, July 6th, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.