The construction package – an in depth analysis

Where COVID-19 has created a lot of challenge for the industries to survive, it has at the same time threaten the economy of all the countries around the globe. The need for the state to keep its wheel of economy running under the locked down situations besides protecting the employment of the citizen is really a massive task. Under these situations if we talk about developing countries like ours, Pakistan, then the risk increases by many folds. However, the situation is contrary to it. With the mercy of Almighty, we have remained successful in terms of limiting the number of cases of COVID-19. Simultaneously, the brains of the state worked out together to find out a sector which could be most favorable to the existing scenario of the country.It was found out to be the Construction Sector, which was given a status of the Industry by Prime Minister of Pakistan in his speech of 3rd April 2020 in which an incentive package was announced for this sector. This sector is directly or indirectly connected to and supports almost 72 industries besides cement, steel, iron, goods transportation etc. Undoubtedly, it is a stimulus package which could help in creating more employment in urban areas just like what agriculture does in rural areas.

On 17th April 2020, President of Pakistan promulgated The Tax Laws (Amendment) Ordinance, 2020 considering National Assembly was not in session. Later on, vide Finance Act, 2020 it was officially made part of the Income Tax Ordinance, 2001 [the Ordinance] by insertion of Section 100D and Eleventh Schedule to the Ordinance. The taxation given through this package for builders and developers is somewhat similar, to what that was announced vide Finance Act, 2016 by insertion of section 7C and 7D of the Ordinance which was later restricted to tax year 2017 only vide Finance Act, 2017. The good thing about this package is that Government has also given the subsidy of PKR 30 billion for 100,000 houses to be constructed under Naya Pakistan Housing Programs which means on an average PKR 0.3 million per house is given as subsidy. However, per the estimates each house would cost in between PKR 5 to 7 million respectively. Therefore, to facilitate further, commercial banks would be financing the construction at concessional rates of 5% and 7% respectively if financing is obtained for this purpose.

This Construction Package basically is for builders and developers who gets their projects registered with the Federal Board of Revenue [FBR] as an irrevocable option. The projects have been divided into two types, New projects or Existing projects. New projects are those projects which are started from any day in between 17th April 2020 to 31st December 2020 and gets completed on or before 30th September 2022. Whereas, Existing projects are those projects that were started before 17th April 2020 and were incomplete on this date, which are to be completed till 30th September 2022 along with mentioning the percentage on completion till 30th June 2019. The life for new projects cannot be more than 2.5 years and for existing projects it cannot exceed 3 years.

The tax by builders and developers registering their projects, is to be paid, based on, the area and rate per area which has been specified for different cities, which will be a final tax on their income. It means, no other benefits in terms of deduction, deductible allowances, losses or tax credits would be allowed except tax credits under section 236A and section 236K respectively. However, this tax liability will be further reduced by 90% in case if projects are registered with Naya Pakistan Housing & Development Authority [NAPHDA] or Ehsaas Programme. The tax is required to be paid over the period of project life and in each year on quarterly basis.

As an incentive, minimum tax on turnover under section 113 of the Ordinance, as well as, alternative corporate tax under section 113C of the Ordinance will also not be applied. The withholding tax under section 153 of the Ordinance shall not apply on builders and developers on purchase of cement & steel along with the services received from non-corporate sector. The dividend to be paid out of a company formed as builder or developer shall also not be subject to withholding of tax under section 150 of the Ordinance. While, the profits and gains accruing from the project in the books of accounts or wealth statement cannot exceed 10 times of the tax paid.

Another most important question that is subject of discussion these days, is regarding the tax immunity available in this package, which means no questions are going to be asked regarding source of investment under section 111 of the Ordinance if registration is obtained. Before, we move on, it is essential to mention that tax immunity will only be available if registration with FBR is done. Basically, there are two tax immunities, one for capital investment in new projects for builders & developers and the other for purchasers.

As far as the capital investment in new projects are concerned, that investment is required to be in form of equity and not in form of borrowed funds. The capital investment could be made in new projects in form of sole proprietorship basis, forming a new partnership or incorporating a new company in between 17th April 2020 to 31st December 2020 with a single object as builder or developer. This investment can be either in form of money or land. If it is in form of money, then a new bank account shall be opened from 17th April 2020 till 31st December 2020 and deposited in it. While, if it is in form of land then the ownership shall be there on 17th April 2020. In case, if investment is to be made via company or partnership then the money shall be deposited in their account and land shall be transferred till date mentioned above. Both land and money are required to be fully utilized for projects only. On completion of the project certification for the project is also required to be submitted from concerned authorities.

The second tax immunity is for the purchasers which include first purchaser of building or unit, or purchaser of a plot who constructs building on it. In case of first purchaser of a building or unit, regardless of project being a new project or existing one, full payment (balance in case of existing) is required to be made through cross banking instrument from date of registration of project till 30th September 2022. This building or unit to be purchased by the first purchaser shall be from the project of any builder or developer already registered with the FBR. While, regarding the purchase of a plot with an intention to construct a building or a unit, the purchase shall be made till 31st December 2020 with the commencement of construction till this date. While, it shall be completed till 30thSeptember 2022.

It is pertinent to mention that the tax immunity will not be available in three cases. Firstly, the holder of public office or spouse or dependents. Secondly, for a public listed company, real estate investment trust or a company whose income is exempt from tax. Lastly, investments from proceeds from criminal offence including money laundering, terror financing or extortion etc.While, as far as the valuation of land or building in case of tax immunity is concerned, it would be the higher of; 130% of FBR value or valuation done by at least two independent valuers of State Bank of Pakistan, the value being lower of them, at the option of person making investment.

Although, there do exist a view that this package is more supportive to builders and developers than to a common man as generally people with low incomes face liquidity issues and this would be beyond their range. Having said this, if positive results from this construction package are to be derived in form of, prosperity of the citizens and boosting the economy, then more than 1,000 mega projects are required to be completed under this package. Presently, there are delays being faced on the part of concerned authorities granting the approvals of layout plans etc. which needs to be resolved urgently to facilitate taxpayers more. While, moreawareness needs to be created amongst the public for this package as there still exists the ambiguity in people regarding the applicability and implementation of the said package.