Comments on Tax Laws Amendment Ordinance 2020
Comments on Tax Laws Amendment Ordinance 2020: The COVID-19 pandemic has created a worldwide crisis due to which industries, businesses, offices, services have been shut down in Pakistan and economic activity is at a stand-still. Such situation has adversely affected Pakistan’s economy and all segments of the society, population are suffering from economic hardship. IMF anticipates that there would be a significant cut in imports from Pakistan, the remittances would drop, tax collection would reduce considerably, and the growth rate might reduce to one and a half percent (1.5%).
The Honourable Prime Minister of Islamic Republic of Pakistan in his address to the nation on 3 April 2020 stated that in the existing circumstances, the poor and most vulnerable segments of the population, including the daily wagers in Pakistan are at most risk of suffering and facing grave danger to their livelihood. Accordingly, in order to protect and revive the economy of Pakistan, the Honourable Prime Minister stated that it is essential and critical to give incentives for revival of the construction industry, because it is believed that more than fifty (50) industries are related to the construction industry.
Pakistan is under the IMF loan package period and there is a reasonable ground to believe that the Government of Pakistan has agreed to discourage all types of tax amnesties schemes. As such under the present regime, will the construction incentive package effect negatively?
We have reasons to believe that prior to promulgation of the Amendment Ordinance, the Government of Pakistan has discussed the construction incentive package on number of occasions with the IMF team.
Furthermore, IMF’s resident representative in Islamabad, Teresa Daban Sanchez, supported the government’s construction package to absorb daily wage earners. She was addressing an online Policy Dialogue organized by the Sustainable Development Policy Institute.
What are other items announced by the Honourable Prime Minister of Pakistan on 3 April, 2020 but are not a part of the Amendment Ordinance?
We hope that the following number of other special incentives for the construction industry will be provided in the forthcoming budget announced in the incentive package by the Honourable Prime Minister of Pakistan.
(i) establishment of Construction Industry Development Board;
(ii) revised valuation of real estate/plots;
(iii) rationalization of capital gain tax rates and period;
(iv) rationalization/reduction in sales tax on construction material;
(v) rationalization of provincial taxes on construction related services;
(vi) establishment of special circles for construction industry;
(vii) measures for creating ease of doing business by the provinces;
(viii) lower interest rates for housing mortgage/financing;
(ix) removal of irritants in development of Real Estate Investment Trust; and
(x) reduction in stamp duty for transfer of immovable property.
Construction industry has been given status of “Industrial undertaking” through the Amendment Ordinance. What advantages/incentives will be available to the construction industry through grant of such status?
The scope of the term “industrial undertaking” has been enlarged by inserting the following new sub-clause (aa) in Clause (29C) of Section 2 in the IT Ordinance with effect from 1 May 2020:
“From the 1st day of May, 2020 a person directly involved in the construction of buildings, roads, bridges and other such structures or the development of land, to the extent and for the purpose of import of plant and machinery to be utilized in such activity, subject to such conditions as may be notified by the Board.”
We anticipate that persons who opt to avail the Scheme 2020 provided under Section 100D of the Income Tax Ordinance 2001 (the “IT Ordinance”) would entitle to obtain exemption certificate for import of raw material, plant, machinery, equipment and parts for its own use.
Further, we are of the view that like other “industrial undertaking”, any benefit available under the Sales Tax Act 1990 and Customs Act 1969 will also be available to the people directly involved in the business of construction of buildings, road, bridges and other such structures or the development of land.
Since the Senate and the National Assembly were not in session and the President of the Islamic Republic of Pakistan was satisfied that circumstances exist, which render it necessary to take immediate action. Therefore, in exercise of the powers conferred by Article 89(1) of the Constitution of the Islamic Republic of Pakistan 1973, the President of Islamic Republic of Pakistan promulgated the Amendment Ordinance on 17 April 2020.
The Amendment Ordinance has made substantial amendments in the IT Ordinance and the Finance Act 1989 (the “Act 1989”) to provide relief to construction industry in Pakistan.
The Amendment Ordinance has introduced Optional “Fixed Tax Regime” under Section 100D read with Rules to the IT Ordinance from the tax year 2020 and onwards for builders and developer on project by project basis in respect of income, profits and gains earned from new or incomplete existing projects. Scheme 2020 is not mandatory.
No, the Amendment Ordinance will be applicable to the new as well as to the existing eligible projects on project-by-project basis registered with the Federal Board of Revenue (“FBR”) on the online IRIS web portal under Section 100D of the IT Ordinance (“Special provisions relating to Builders and Developers”) read with Eleventh Schedule to the IT Ordinance being the rules for computation of profits and gains of Builders and Developers and tax payable thereon (the “Rules”).
The newly inserted clauses (a) and (c) of subsection (9) of Section 100D of the IT Ordinance provides the following definitions of “builder” and “developer” respectively:
(a) The term “builder” means “a person who is registered as a builder with the Board and is engaged in the construction and disposal of residential or commercial buildings.
(b) The term “developer” means “a person who is registered as developer with the Board and is engaged in the development of land in the form of plots of any kind either for itself or otherwise.”
The newly inserted clauses (d) and (f) of subsection (9) of Section 100D of the IT Ordinance provides the following definitions respectively:
(a) The term “Existing project” means “a construction or development project, which (a) has commenced before the date of commencement of the Amendment Ordinance 2020; (b) is incomplete; (c) is completed on or before the 30th day of September, 2022; and (d) a declaration is provided in the registration form under Eleventh Schedule to the effect of percentage of the project completed up to the last day of the accounting period pertaining to tax year 2019.”
(b) The term “New project” means “a construction or development project which (a) is commenced during the period starting from of commencement of the Tax Laws (Amendment) Ordinance 2020 and ending on the 31st day of December 2020 and (b) is completed on or before the 30th day of September 2022.”
The provision of Section 100D read with Rules to the IT Ordinance shall be applicable to eligible projects (new and existing) for the tax year 2020 and onwards.
However, any income, profits and gains of a builder or a developer, as the case maybe, of an incomplete existing project earned up to tax year 2019 will be taxed under the provisions of the IT Ordinance prior to the commencement of the Amendment Ordinance.
Any tax paid on income, profits and gains of the eligible projects under Section 100D read with the Rules will be final tax. However, any income of a builder or developer other than income, profits and gains subject to tax under Section 100D of the IT Ordinance will be subject to normal tax regime as per the provisions of the IT Ordinance.
(a) Pursuant to Rule (2) read with Rule 10 of the Rules, income tax will be payable on project by project basis at the rates provided in below:
| Rate in respect of | |||
| (1) | (2) | (3) | (4) |
| Area in | Karachi, Lahore and Islamabad | Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad and Quetta | Urban areas not specified in columns (2) and (3) |
| TAX ON BUILDERS FOR COMMERCIAL BUILDINGS | |||
| Sq. Ft. | – | – | – |
| Any size | PKR 250 per Sq. ft. | PKR 230 per Sq. ft. | PKR 210 per Sq.ft |
| FOR RESIDENTIAL BUILDINGS | |||
| Sq. Ft. | – | – | – |
| Up to 3,000 | PKR 80 per Sq. ft. | PKR 65 per Sq. ft. | PKR 50 per Sq.ft |
| Exceeding
3,000 |
PKR 125 per Sq. ft. | PKR 110 per Sq. ft. | PKR 100 per Sq.ft |
| TAX ON DEVELOPERS (ENTIRE PROJECTS) | |||
| Sq. Yds | – | – | – |
| Any size | PKR 150 per Sq.yd | PKR 130 per Sq.yd | PKR 100 per Sq.yd |
| FOR DEVELOPMENT OF INDUSTRIAL AREA | |||
| Sq. Yds. | – | – | – |
| Any size | PKR 20 per Sq.yd | PKR 20 per Sq.yd | PKR 10 per Sq.yd |
(b) In case of mixed-use buildings having both commercial and residential areas, respective rates outlined
above will apply.
(c) In case of development of plots and constructing buildings on the plots as one (1) project, both rates shall
apply.
Provided that in case of low-cost housing and all projects developed by Naya Pakistan Housing Development Authority, the higher rate shall apply.
(d) The annual tax liability will be computed in the following manner:
Tax liability as per the rates specified above
Estimated project life in years
What estimated project life is allowed under the Scheme 2020?
The estimated project life for tax purposes shall not exceed two and a half (2.5) years. However, in case of an existing incomplete project, the estimated project life shall be treated as three (3) years from tax year 2020 through tax year 2022 and tax in this respect shall be reduced by the percentage of completion method up to the last day of the accounting period pertaining to the tax year 2019, as declared in the registration form: Provided further that tax liability of tax year 2020 shall be paid along with return. Please note that Rule 2(2)(c) of the Rules also provides that a year will include fraction of a year.
Which project would be considered as ‘Eligible Project’ for the purposes of Section 100D read with the Rules?
(a) The Scheme 2020 is applicable to a builder or developer who opts to pay fixed tax in accordance with Section 100D read with the Rules and will apply to the following projects:
- i) A “New Project” to be completed by 30 September 2022; or
- ii) An incomplete “Existing project” to be completed by 30 September 2022.
(b) A builder or developer who wishes to avail the benefit of Scheme 2020 under Section 100D of the IT
Ordinance is required to electronically register the project for which the benefit is being claimed on IRIS online portal on or before 31 December 2020. Such submission is required to be through filing of:-
- i) registration form in the prescribed manner which must include inter alia details of the member(s) or
shareholder(s) of the builder or the developer; and
- ii) an irrevocable option to be assessed under the Rules in respect of each project. However, a developer
who is also a builder or vice-versa in case of a project is required to submit two separate forms for registration as a developer and as a builder.
(c) In addition, a builder or developer availing the Scheme 2020 introduced through Section 100D of the IT
Ordinance is required to file electronically a return of income and wealth statement in the prescribed form
accompanied with evidence of payment of due tax. Such submission will be taken as an assessment order issued to the taxpayer by the Commissioner for all intents and purpose of the IT Ordinance to the extent of income computed under the Rules.
- What type of allowances, tax credits, expenditure and set off & carry forward of losses to the losses
would not be available while computing the income and tax thereon on the eligible projects under Section 100D read with the Rules?
Where any person opts to be taxed under Section 100D read with the Rules, while computing the income and tax thereon, the following will be applicable:
(a) the income derived from eligible project(s) will not be chargeable to tax under any head of income in
computing the taxable income of such person;
(b) deduction for any expenditure incurred in deriving income from eligible project(s) will not be allowed under
the IT Ordinance;
(c) any income derived from eligible project(s) will not be reduced by:
- i) any deductible allowance under Part IX of Chapter III of the IT Ordinance viz Zakat, Workers’ Welfare
Fund, Workers’ Participation Fund, Profit on Debt and Education Expenses; or
- ii) the set off of any loss.
(d) no tax credit will be permitted against the tax payable on the income derived from the eligible project other
than tax credit under Section 236K of the IT Ordinance collected from the builder or developer after the commencement of the Amendment Ordinance (17 April 2020) on purchase of immovable property utilized in eligible project(s); and
(e) no refund of any tax collected or deducted under the IT Ordinance will be permitted.
- Whether I need to be physically present for registration of an eligible project and making payment?
No, physical presence is not required. You may electronically register the project through FBR’s web portal and make payment online, using FBR’s online payment.
- If any person who has paid tax on project-by-project basis at the prescribed tax rate in accordance
with the Rules, being final discharge of his tax liability, will he still be required to pay minimum tax on turnover or Alternative Corporate Tax?
No, if any person opts to pay tax under Section 100D read with the Rules on project-by-project basis, the provisions of Section 113 (Minimum tax on the income of certain persons) and Section 113C (Alternative Corporate Tax) of the IT Ordinance will not apply on (i) the turnover, (ii) income (iii) profits and (iv) gains, of a builder or developer from the eligible project(s) shall not apply. Moreover, all provisions of the IT Ordinance on non-payment or short payment of tax will be applied accordingly.
- May I file manual paper-based registration form along with an irrevocable option?
No, the declaration needs to be filed online/ electronically on FBR’s web-portal only.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 6
- Whether the builders and developers are required to withhold tax on payment made by them on the
eligible project for goods, services and contracts?
Rule (7) of the Rules provides that builders and developers are not required to comply with the provisions of Section 153 (Payment for goods, services and contracts) of the IT Ordinance in respect of:
(a) purchase of building material except steel and cement; and
(b) services of plumbing, electrification, shuttering and any other similar services except for services provided
by companies.
- Will the shareholder of a company as a taxpayer be liable to pay tax on “Dividend Income”
distributed out of income earned by the company from the eligible projects under the Amendment Ordinance?
Pursuant to subsection (7) of Section 100D of the IT Ordinance, the income from dividends paid by a builder or developer being a company to its shareholders out of profits and gains earned from an eligible project will not be subject to tax under the IT Ordinance.
Similarly, the provision of Section 150 of the IT Ordinance for withholding of tax on payments of such exempt dividend shall not apply.
- Will the member of AOP as a taxpayer be liable to pay on “Share of Profit” distributed out of income
earned by the AOP from the eligible projects under the Amendment Ordinance?
Section 92 of the IT Ordinance provides that “an association of persons” shall be liable to tax separately
from the members of the association and where the association of persons has paid tax the amount
received by a member of the association in the capacity as member out of income of the association shall
be exempt from tax.
- For the purposes of Scheme 2020, when will the commencement of an eligible project will occur?
Pursuant to the definition provided in Rule 9(d) of the Rules, commencement of an eligible project will occur upon the occurrence of the following on or before 31 December 2020:
(a) In case of a construction project, when lay out plan is approved by the concerned authority; and
(b) In case of a development project, when the development plan is approved by the concerned authority.
- For the purposes of Scheme 2020, when will the completion of an eligible project will occur?
Pursuant to the definition provided in Rule 9(e) of the Rules, completion of an eligible project will occur upon the occurrence of the following on or before 30th September 2020:
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 7
- i) In the case of a builder, the date on which the grey structure is completed. Note that a grey structure
shall only be considered as completed when the roof of the top floor has been laid in accordance with the approved plan.
- ii) In the case of a developer, the date on which (a) at least fifty percent (50%) of the total plots have been
booked in the name of the buyers; (b) at least forty percent (40%) of the sale proceeds from such bookings have been received; (c) landscaping has been completed; and (d) at least fifty percent (50%) of the roads have been laid up to sub-grade level as certified by the approving authority or NESPAK.
- How and when will the tax liability computed on an eligible project be discharged?
Tax calculated under Section 100D read with the Rules is required to be paid in advance under Section 147 of the IT Ordinance in four (4) quarterly instalments. All provisions of the IT Ordinance on non-payment or short payment of tax will be applicable accordingly.
- If any Individual builder or developer intend to make capital investment in a construction project
which is neither declared nor the source of income of such investment can be explained. What are the relevant provisions under the Amendment Ordinance to cater the above situation?
Newly inserted Section 100D(3) of the IT Ordinance provides that the provisions of Section 111 of the IT
Ordinance (Unexplained income or assets) shall not be applicable to “Capital Investment” made in a
“New Project” in the form of money or land by a builder or developer which is an individual, subject to the
following conditions:
(a) where the investment is in the form of money, the builder or developer, the case may be, is required to
open a new bank account and deposit money in such bank account on or before 31 December 2020; or
(b) where the investment is made in the form of land, the title of such land must vest in the name of such
builder or developer at the time of commencement of the Amendment Ordinance.
- We three friends have decided to jointly start a construction business as builder or developer in
the form of a company or an association of person and agreed to contribute capital investment which is neither declared nor can be explained. What are the relevant provisions under the Amendment Ordinance to cater the above situation?
(a) Newly inserted Section 100D(3) of the IT Ordinance provides that the provisions of Section 111 of the IT
Ordinance (Unexplained income or assets) will not be applicable to “Capital Investment” made in a “New Project” in the form of money or land by a builder or developer which is a company or an association of persons, subject to the following conditions:
- i) such company or the association of persons, as the case may be, making such investment is required
to be a single object (builder or developer) registered under the Companies Act 2017 or the Partnership Act 1932 between 17 April 2020 and 31 December 2020;
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 8
- ii) such person is required to be a member of such association of person or a shareholder of such
company.
(b) It is our view that in order to be taxed under Section 100D of the IT Ordinance, the company or an
association of persons must be newly formed with single object between 17 April 2020 and 31 December
2020.
(c) In addition to the above, where such investment is in the form of:
- i) money, it must be invested through a crossed banking instrument deposited in the bank account of
such company or association of person, on or before 31 December 2020; or
- ii) land, such land is required to be transferred to such company or association of person, on or before
31 December 2020 subject to the condition that the person investing such land must have ownership of such land on 17 April 2020;
(d) Any person investing any money or land, as the case may be, is required to submit a prescribed form on
the IRIS web portal;
(e) Any money or land invested must be wholly/fully utilized in an eligible project; and
(f) Completion of the eligible project is required to be certified in the following manner:
- i) In the case of a builder, the relevant map approving authority or NESPAK shall certify that the grey
structure has been completed by the builder in accordance with the approved map of the eligible project on or before 30 September 2022;
- ii) In the case of a developer, (1) the relevant map approving authority or NESPAK shall certify that
landscaping of such project has been completed on or before 30 September 2022; and (2) a firm of
Chartered Accountants approved by ICAP with QCR rating of ‘satisfactory’ and notified by the FBR
for this purpose, shall certify that booking of minimum fifty percent (50%) of the plots has been made
and sale proceeds equal to forty percent (40%) from such bookings has been received by 30
September 2022; and
iii) Not less than fifty percent (50%) of the roads in such approved project have been laid up to sub-grade
level certified by the relevant approving authority or NESPAK.
- If I intend to purchase a building or a unit directly from the builder but the fund available with me
are neither disclosed previously in my wealth statement nor can I explain the source of such investment, what would be your advice in this regard?
In addition to non-applicability of Section 111 of the IT Ordinance on investments made in an eligible
project, the Amendment Ordinance also provided that such provisions will also not apply to the following:
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 9
In respect of purchase price paid by the “First purchaser” of a building or a unit of the building from the builder subject to the following:
- a) New Projects
Full payment is made through crossed banking instruments to the builder in a period commencing from the registration of the requisite project with FBR and 30 September 2022.
- b) Existing projects
Full or the balance amount is paid through a crossed banking instrument to the builder in the period commencing from the registration of the requisite project with FBR and 30 September 2022.
Please note that the term “First purchaser” has been defined in Section 100D(9)(e) of the IT Ordinance as “a person who purchases a building or a unit, as the case may be, directly from the builder and does not include a subsequent or a substituted purchaser”.
- If I make payment for purchase of plot out of my undeclared and unexplained fund with the intention
of constructing a building on such plot, will I qualify under the Scheme 2020?
Yes. If any purchase price is paid by the purchaser of a plot with the intention to construct a building on such plot, the provisions of Section 111 of the IT Ordinance will not apply and you may qualify to be assessed under the Scheme 2020, subject to the following conditions:
(a) the complete purchase is made and price for such plot is paid on or before 31 December 2020 through a
crossed banking instrument;
(b) construction on such plot is commenced on or before 31 December 2020 and such construction is
completed on or before 30 September 2022; and
(c) such purchaser of the plot in question registers himself with the FBR on the online IRIS web portal.
- Who are the persons (including companies) not eligible or qualify for the incentives announced
under the Amendment Ordinance?
The provisions of Section 111 of the IT Ordinance will continue to apply and such protection will not available to the following:
(a) holder of any public office as defined in the Voluntary Declaration of Domestic Assets Act 2018 or his
benamindar as defined in the Benami Transactions (Prohibition) Act 2017 or his spouse or dependents;
(b) a public listed company, a real investment trust or a company whose income is exempt under any provision
of the IT Ordinance; or
(c) any proceeds derived from the commission of a criminal offence including the crimes of money laundering,
extortion or terror financing but excluding the offences under the IT Ordinance.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 10
- Can I incorporate the value of land or building or unit under an eligible project in my books of
accounts and if so, how will such value be determined?
Where the conditions provided are met, the value or price of the land or building, as the case be, in question will be higher of:
- i) one hundred and thirty percent (130%) of the fair market value as determined by FBR under Section 68(4)
of the IT Ordinance; or
- ii) at the option of the purchaser in question, the lower of the values determined by at least two (2)
independent valuers from the list of valuers approved by the State Bank of Pakistan, from time to time.
Such value or price as determined in accordance with Section 100D(5) of the IT Ordinance can be incorporated in the books of accounts by the declarant.
- Is there any reduction in tax available to the “low cost housing projects”?
Yes, the Amendment Ordinance has inserted a new clause (9B) in Part III of the Second Schedule to the IT Ordinance, as a result of which any tax payable on the income, profits and gains earned from low cost housing projects, developed or approved by Naya Pakistan Housing and Development Authority (“NAPHDA”) or under the Ehsaas Programme will be reduced by ninety percent (90%).
Clause (f) of Rule (9) of the Rules provides the definition of “low cost housing” as “a housing scheme as developed or approved by NAPHDA or under the Ehsaas Programme”.
- Whether a builder or developer is allowed to incorporate profits and gains in the books of account
if he opts to pay tax on the eligible project under Section 100D of the IT Ordinance read with the
Rules?
Yes, Rule 6 of the Rules provides that a builder or a developer which has opted to be taxed under Section 100D of the IT Ordinance will be allowed to incorporate profits and gains accruing from the relevant projects up to ten (10) times of the tax paid under the Rules.
- What kind of certification is required by a builder or developer to submit to the FBR in respect of
an eligible project?
Rule (4) of the Rules provides that each builder or developer which opts to be taxed under Section 100D
of the IT Ordinance read with the Rules is required to provide to the FBR, a certificate in the prescribed
manner, in respect of the eligible project, from the relevant map approving authority or NESPAK providing
the following:
- ‘total land area’ in square yards;
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 11
- ‘covered area’ in square feet;
- ‘saleable area’ in square feet; and
- type (commercial, residential or industrial) of saleable area or the total land area, as the case may be.
Clauses (a) and (j) of Rule (9) of the Rules provide the definition of the terms “area” and “saleable area” respectively are as follows:
(a) The term “area” means “(i) in case of a builder (a) in case of a commercial or a residential building
excluding a house, the saleable area of the building; and (b) in case of a house, the covered area of house;
(ii) in case of a developer, the total land area of a project.”
(b) The term “saleable area” means “in case of buildings, means saleable area as determined by the
approving authority or map approving authority or NESPAK under the relevant laws.”
- If any person intentionally or willfully makes a misrepresentation or suppresses any facts while
filing of return or declaration under Section 100D read with the Rules to the IT Ordinance, will there any action be taken against him under the IT Ordinance in this regard?
Yes, where a return or declaration has been made under Section 100D of the IT Ordinance read with the Rules through willful misrepresentation or suppression of facts, the Commissioner may declare such return or declaration, as the case may be, void after (i) providing an opportunity of being heard and (ii) prior approval from the FBR has been obtained by him.
- What would be the treatment where any term or provision has not been specifically dealt with in
Section 100D read with the Rules to the IT Ordinance?
Sub-section (10) of Section 100D of the IT Ordinance provides that all other provisions of the IT Ordinance
not specially dealt with in Section 100D read with the Rules will continue to apply mutatis mutandis to
builders or the developers, as the case may be, in so far as they are not inconsistent with Section 100D or
the Rules.
- The prime conditions for commencement of construction or development projects are that
approval of “lay out plan” and “development plant” respectively should be approved by the
concerned authority on or before 31st December, 2020. What would be the consequences, if builder
or developer could not procure such approval before the stipulated date of 31st December, 2020?
Where builder or developer fails to procure such approval; but, have taken all actions and done all things which are required and necessary to procure any approvals; but any such approval is delayed beyond a period of 30 days from the date of relevant application and the cutoff date of 31st day of December, 2020 is not adhered to by the builder or developer, the Board may provisionally accept commencement of such project on a case to case basis.
Please note there will be no relaxation for completion of project. The project should be completed on or before 30th September, 2022 and duly certified by the approving authority or NESPAK.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 12
- Who is a holder of Public Office for the purpose of the Amendment Ordinance?
A holder of public office is a person who is or has been, during the preceding ten (10) years commencing from 22 May 2018 is:
(a) The President of Islamic Republic of Pakistan or the Governor of a Province;
(b) The Prime Minister, Chairman Senate, Speaker of the National Assembly, Deputy Chairman Senate,
Deputy Speaker National Assembly, Federal Minister, Minister of State, Attorney-General for Pakistan and other Law Officers appointed under the Central Law Officers Ordinance, 1970 (VII of 1970), Adviser or Consultant or Special Assistant to the Prime Minister and holds or has held a post or office with the rank or status of a Federal Minister or Minister of State, Federal Parliamentary Secretary, Member of Parliament, Auditor-General of Pakistan, Political Secretary;
(c) the Chief Minister, Speaker Provincial Assembly, Deputy Speaker Provincial Assembly, Provincial
Minister, Adviser or Consultant or Special Assistant to the Chief Minister and who holds or has held a post or office with the rank or status of a Provincial Minister, Provincial Parliamentary Secretary, Member of the Provincial Assembly, Advocate-General for a Province including Additional Advocate-General and Assistant Advocate-General, Political Secretary;
(d) the Chief Justice or, as the case may be, a Judge of the Supreme Court, Federal Shariat Court, a High
Court or a Judicial Officer whether exercising judicial or other functions or Chairman or member of a Law Commission, Chairman or Member of the Council of Islamic Ideology;
(e) holding an office or post, in the service of Pakistan or any service in connection with the affairs of the
Federation or of a Province or of a local council constituted under any Federal or Provincial law relating to
the constitution of local councils, co-operative societies or in the management of corporations, banks,
financial institutions, firms, concerns, undertakings or any other institution or organization established,
controlled or administered by or under the Federal Government or a Provincial Government or a civilian
employee of the Armed Forces of Pakistan: Provided that a member of the Board, not actively engaged in
the business and day-today affairs of the said corporations, banks, financial institutions, firms, concerns,
undertakings or any other institution or organization shall not be treated as holder of public office under
this sub-clause;
(f) the Chairman or Mayor or Vice Chairman or Deputy Mayor of a zila council, a municipal committee, a
municipal corporation or a metropolitan corporation constituted under any Federal or Provincial law relating to local councils;
Explanation: For the purpose of this sub-clause the expressions “Chairman” and “Vice Chairman” shall include “Mayor” and “Deputy Mayor” as the case may be, and the respective councilors therein;
(g) a District Nazim or District Naib Nazim, Tehsil Nazim or Tehsil Naib Nazim or Union Nazim or Union Naib
Nazim.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 13
- Please define “Benamidar”, “Benami property” and “Benami Transaction” for the purposes of the
Amendment Ordinance?
Following are the definitions of the aforementioned terms as provided under the Benami Transactions
(Prohibition) Act 2017 and will continue to apply to the provisions of the Amendment Ordinance as well:
- a) Benamidar
A person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name.
- b) Benami property
Any property, which is the subject matter of benami transaction and also includes the proceeds from such
property.
- c) Benami transaction
(A) A transaction or arrangement:
(a) where a property is transferred to, or is held by, a person and the consideration for such property has
been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided
the consideration, except when the property is held by:
(i) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in
such capacity and includes a trustee, executor, partner, director of a company, agent or legal adviser and any other person as may be notified by the Federal Government for this purpose; or
(ii) any person being an individual in the name of his spouse or in the name of any child or in the name of
his brother and sister or lineal ascendant or descendant and the individual appearing as joint owner in any document of such individual and the consideration for such property has been provided or paid out of known resources of income of the individual; or
(B) a transaction or arrangement in respect of a property carried out or made in a fictitious name; or
(C) a transaction or arrangement in respect of a property where the owner of the property is not aware of, or
denies knowledge of, such ownership; or
(D) a transaction or arrangement in respect of a property where the person providing the consideration is not
traceable or is fictitious.
- I am a retired government servant. Can I register construction project under Scheme 2020?
Yes, however, the “Holders of Public Office” defined in the Voluntary Declaration of Domestic Assets
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 14
Act, 2018 or his Benamidar as defined in the Benami Transactions (Prohibition) Act 2017 (V of 2017) or their spouses and dependents are not eligible/entitled to take advantage of the Scheme 2020.
- If any person who is acquiring shareholding from the person who has claimed exemption under
Section 111 read with Section 100D of the IT Ordinance, will he also be entitled to claim the same exemption for such investment made by him?
(a) The exemption under Section 111 of the IT Ordinance would be available to the person who is making
capital investment in accordance with Scheme 2020. Since you are not purchasing shares from a person
who made investment under the Scheme 2020 and making direct capital investment under the Scheme
2020; therefore, you will not be entitled to claim the incentives under Scheme 2020 for such capital
investment.
(b) Moreover, in order to claim exemption under the provisions of section 111 read with section 100D of the
IT Ordinance, Rule (8) of the Rules restricts a shareholder or a partner of a builder or developer from changing its ownership in such company or association of person, as the case may be, from an incomplete project except where at least fifty percent (50%) of the total project cost which has been incurred up to the date of such change of ownership, as certified by a firm of Chartered Accountants holding ICAP QCR rating of ‘satisfactory’ and notified by the FBR for such purpose.
(c) Rule 8(b) and Rule 8(c) of the Rules however permit the change of ownership in the following events:
(i) the succession to legal heirs of the share of a deceased shareholder or a partner, as the case may be;
and
(ii) the joining of additional partners or shareholders after 31 December 2020 but restricts the exemption under
Section 111 read with section 100D(3) of the IT Ordinance which may otherwise be available to the additional partners or shareholder(s), as the case may be.
- Can I being not dependent or relative to the “Public Office Holder” can gift or sale the assets below
the value declared under the Scheme 2019?
We are of the view that by doing so the purpose of restriction imposed under the Amendment Ordinance read with the Rules will be defeated. As such, in our opinion eligible project declared under the Amendment Ordinance read with the Rules is prohibited to be transferred to any holder of public office as a gift or sale by you below the value declared under Scheme 2020 or below the fair market value.
- If any builder or developer earns income, profit or gain more than ten (10) times of the tax paid
under Section 100D read with the Rules, how would the tax be computed on such excess amount?
The mode and manner of taxation of such excessive income has not been provided under the Amendment
Ordinance. However, it is our view that income, profits and gains accruing from an eligible project over and
above ten (10) times of the tax paid under the Rules, would be taxed under the normal tax regime and tax
thereon. The tax paid under Section 100D read with the Rules would be considered as tax on separate
block of income.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 15
40 If any builder or developer, who opts to be taxed under the Scheme 2020; but suffer loss from the
eligible project, will the tax paid under the fixed tax regime will be refunded to the taxpayer or carry
forward for adjustment against any other project of set-off and carry forward of loss will be
allowed?
In our view, if any builder or developer opts to pay tax under the “New Fixed Tax Regime”, such tax is a full and final discharge of tax liability on such eligible project; irrespective of the fact that taxpayer suffer loss or earn profit from such project. There shall be no refund of tax or carry forward of any tax collected or set-off of or carry forward of any loss.
- What would be the tax liability? If any builder or developer (AOP), who has earned income other
than income, profit and gains from the sale of buildings, units or plot from an eligible project under Section 100D read with Rules?
The builder or developer will pay fixed tax on the income, profit or gains from the new fixed tax regime
under Section100D read with Rules to the IT Ordinance; however he will pay tax under the “Normal Tax
Regime” on “Other Income” under Division I, Part I, First Schedule to the Income Tax Ordinance.
- XYZ Limited a builder opts to pay tax on income, profit and gains from its eligible construction
project registered on FBR IRIS Web-Portal, however, for reasons beyond control, company fails to pay required tax within the stipulated time. Under this circumstance, whether the declaration filed would be null and void?
No, the declaration filed under the Scheme 2020 related to an eligible project would not be void for nonpayment or short payment of tax. However, such due amount of tax would be recovered, and all the provisions of the IT Ordinance shall apply accordingly.
- What type of, benefits are available to persons other than Builders and Developers under the
Scheme 2020?
(a) No question will be asked under Section 111 of the IT Ordinance regarding the unexplained investment
made by the “First Purchaser” of a building or a unit in the building in respect of the purchase price paid
in both cases i.e. a new project or incomplete existing project, where payment is routed through crossed
banking instrument between the date of registration of project with the FBR and September 30, 2022.
(b) Any person purchasing the plot with the intention to construct building thereon shall not be required to
explain his investment under section 111 of the IT Ordinance subject to the condition that he purchases the same, makes the payment thereof and commencement of construction has been made on or before December 31, 2020 and completion of construction by September 30, 2022. The registration of such purchase should also be made with FBR or IRIS portal.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 16
- Can any person who has registered his project under Section 100D read with Rules for payment of
tax under the “Fixed Tax Regime” switch to pay tax under the normal tax regime on the said
project?
No, once any person electronically registered a project on IRIS through FBR website on or before the 31st day of December, 2020 through submission of prescribed registration form along with an irrevocable option to be assessed under the Rules in respect of each project would continue to be liable to pay tax under the “Fixed Tax Regime” provided under section 100D read with Rules to the IT Ordinance.
- Could you please elaborate on “90% tax reduction to the “Low Housing Projects”?
Newly inserted Clause (9B), Part III, Second Schedule to the IT Ordinance provides that the tax payable on the income, profits and gains of projects of “low cost housing” developed or approved by Naya Pakistan Housing and Development Authority (“NAPHDA”) or under the Ehsaas Programme shall be reduced by ninety percent (90%).
It means that the rate of tax computed under Section 100D IT Ordinance, prescribed/provided under Rule
(10) of the Rules shall be reduced by ninety percent (90%). For example, the eligible plot for development of low-cost housing scheme is six thousand (6,000) square yards at Karachi. As such the rate would be PKR 150 square yard, but for the purpose of low-cost housing it would be reduced to PKR 15.
- I own a plot of land in my individual capacity at Karachi on which concealment proceeding under
Section 122(5) of the IT Ordinance have been started prior to 17th April, 2020 and I desire to opt under the Scheme 2020 in respect of above plot. Can I avail the Scheme?
In our view, yes you may opt for the Scheme 2020, before the finalization of proceeding under Section 122(5) of the IT Ordinance provided you being builder or developer shall have the ownership title of the land at the time of commencement of the Amendment Ordinance.
- I have agreed to purchase plot of land for construction of commercial building prior to the
commencement of the Amendment Ordinance and paid almost one hundred percent (100%) of the purchase price. But the title of the plot has not been transferred in my name prior to commencement of the Amendment Ordinance due to some unavoidable circumstances. Can I register the above plot as eligible project under the Scheme 2020?
On examination of the factual position narrated above, your aforementioned plot does not qualify to be an eligible project to be registered under Section100D read with Rules, as the ownership title of the said land was not registered in your name on or before the commencement of Amendment Ordinance.
Even if you consider to make capital investment in the form of land in a project through Company or Association of Persons, the sub-Clause (b) of Sub-Section (3) of Section 100D requires that such land shall be transferred to such Association of Persons or Company, as the case may be, on or before the 31st day of December, 2020 subject to the condition that such person must have the ownership title of the land at the time of commencement of the Amendment Ordinance.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 17
- Section 100D(9)(c) of the IT Ordinance provides that a “Developer” means a person who is
registered as a developer with the Board and is engaged in the development of land in the form of
plots of any kind either for itself or otherwise. In this regard following questions need to be
answered:
- i) What do you mean by development by itself or otherwise?
- ii) Does otherwise means to develop a land where developer has no title except that of rendering the
services for development for land?
We are of the view that “Otherwise” means that either development by the declarant himself/ itself or through some Vendors for roads, bridges etc. Regarding other question, we submit that the holding of title document of the land is the prime condition to qualify as an eligible project under Scheme 2020.
- Section 100D(9)(g) of the IT Ordinance provides the definition of “Project” which means a project
for construction of a building with the object of disposal, or a project for development of land into plots with the object of disposal or otherwise. What do you mean by, a project for development of land into plots with the object of disposal or otherwise?
We are of the view that here the word “Otherwise” means that disposal of unit in the constructed buildings or sell of developed plot or utilization of declarant’s other purposes.
- Section 100D(9)(h) of the IT Ordinance provides the definition of “Registered with the Board”
means registered after submission of form on project-by-project basis on the online IRIS web portal. Does it mean that for every project a new AOP or a Company is to be formed/incorporated or under one company or an AOP number of projects can be registered?
We are of the view that it is not necessary to form new AOP or Incorporate a Company for every project. In fact, an AOP or a Company can have many projects; however, every AOP or Company should have a single objective (builder or developer) and must be registered on project by project basis separately on the FBR’s IRIS web portal.
- The Amendment Ordinance is silent about invocation of statutory provisions viz. 122, 177 & 214C
of the IT Ordinance. What would be the mode and manner in this regard under the Amendment Ordinance?
Although nothing has been stated about the amendment of assessment or audit of income tax affairs in the Amendment Ordinance. However, sub-Section (10) of Section 100D of the IT Ordinance, clearly provides that the provisions of the Ordinance (IT Ordinance) not specifically dealt with in this section (Section 100D) or the rules made thereunder shall apply mutatis mutandis to builders and developers in so far as they are not inconsistent with Section 100D or the rules made thereunder.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 18
- What are the points, which need to be clarified by FBR and what is your view?
Query No.1
Rate of tax for development of industrial area has been provided; whereas no mechanism for certification has been provided.
Our view
All the procedure and mechanism provided for the developer for development of land as entire project shall apply mutatis mutandis to the eligible project for development of industrial area as well.
Query No.2
Clause (d) of Sub-Section (2) of Section 100D of the Ordinance provides that no tax credit shall be allowed against the tax payable under Sub-Section (1) except credit for tax under Section 236K collected from the builder or developer after the commencement of the Amendment Ordinance, on purchase of immoveable property utilized in a project. On the contrary now the builder or developer opt to be taxed under Section 100D read with Rules would be considered as “Industrial Undertaking”, which should have resulted in that:
- a) Tax deducted under Section 148(1) of the IT Ordinance on import of raw material, plant,
machinery, equipment and parts by an industrial undertaking for its own use should be
adjustable;
- b) Tax deducted under Clause (a) of Sub-Section (1) of Section 153 should be adjustable, where
payments are received on sale or supply of goods by a company being manufacturer of such
goods; and
- c) Many other withholding tax provisions, which are adjustable in nature. What is your view?
Our view
On strictly examination of current provisions available under Section100D read with Rules to the IT Ordinance, we are of the view that no refund/adjustment of tax including tax collected under Section 148 or withhold under Section 153 of the IT Ordinance would be made available to any eligible project except tax deducted under Section 236K of the IT Ordinance on the eligible project after the commencement of the Amendment Ordinance.
Whereas, natural justice demands that the credit of tax collected/deducted under any head to earn income,
profit and gains on the eligible project, should be allowed to be adjusted against tax liability against eligible
project.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 19
We would like to remind our readers that almost similar anomaly existed in sub-section (4) of Section 234A of the IT Ordinance inserted through the Finance Act, 2007. However, after a lot of discussion and effort this anomaly was removed by omitting Sub-Section (4) and amendment in sub-Section (3) of Section 234A of the IT Ordinance by the Finance Act, 2017.
We are hopeful that appropriate amendments would be carried out accordingly by the Government.
Query No.3
Section 100D(2)(d) of the IT Ordinance provides that no tax credit shall be allowed against the tax payable under the Scheme 2020 except credit for tax under Section 236K collected from the builder or developer after the commencement of the Amendment Ordinance on purchase of immovable property utilized in the project. If the tax liability on the project completed under the Amendment Ordinance is less than the tax withheld under Section 236K of the IT Ordinance; whether the excess amount of tax would be refundable to the declarant?
Our View
Section 100D(2)(e) clearly provides that “there shall be no refund of any tax collected or deducted under
the Amendment Ordinance. However, in our view natural justice demands that the tax deducted under
Section 236K of the IT Ordinance be fully allowed to be set-off against the complete eligible project.
Query No.4
Section 100D(3)(b)(ii) of the IT Ordinance provides that the provisions of Section 111 of the IT Ordinance shall not apply to capital investment made in the new project in the form of money or land, subject to the conditions that (i) If the investment is made by a person in a project through a company or an association of persons, such company or association of person shall be a single object (builder or developer) company or association of persons, as the case may be and the money or land invested shall be wholly utilized in a project.
On examination of above, the following questions need to be answered:
- a) If the investment exceeds the expenditures, will the excess amount also be immune from
application of Section 111 of the IT Ordinance?
- b) If further investment is required due to any genuine reasons viz. currency fluctuation or force
majeure, will the extra amount invested would also be immune from probe Section 111 of the IT Ordinance?
Our View
Nothing has been stated regarding any additional amount of capital investment made over and above due
to any reasons whatsoever. However, we are of the view that natural justice demands that some
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 20
percentage of declared amounts should be allowed to be considered as part of incentive package and no question should be asked for such investment as well.
Query No. 5
Following Clause (9B) has been inserted in Part III of Second Schedule to the IT Ordinance:-
“(9B) The tax payable on the income, profits and gains of projects of “Low cost housing”, developed or approved by Naya Pakistan Housing and Development Authority (NAPHDA) or under the Ehsaas Programme shall be reduced by 90%.”
Furthermore, Rule (6) of the Rules provides that a builder or developer opting for taxation under Section 100D of IT Ordinance shall not be allowed to incorporate profits and gains accruing from such project in excess of ten items of the tax paid under Rule 2 of the Rules.
In this regard following queries need to be answered:
- a) Whether the developers or builders operating for projects in NAPHDA or under the Ehsaas
Programme shall be restricted to incorporate profit and gain up to ten (10) times of the tax reduced by ninety percent (90%) as the term used tax paid rather than tax chargeable under the Amendment Ordinance?
- b) Where the profit on gain exceeds ten times to the tax paid under this Ordinance, what would
be the treatment to the difference of the income, profit or gain under the Amendment Ordinance?
Our View
The law is very clear that a builder or developer can incorporate income, profit and gains up to ten times of the taxed paid. However, we are of the view that any income over and above ten times of the tax paid will be taxed under the normal tax regime.
Nonetheless, we are of the view that in the low housing projects the declarants should be allowed by the
Government to incorporate the same profit as would have been allowed to other projects i.e. based on tax
chargeable.
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 21
Query No.6
I have wrongly registered the project online, but such declaration contains mistakes. What is the method to revise such incorrect declaration?
Our view
Nothing has been mentioned in the Scheme 2020. However, it is our view that FBR must provide
mechanism for revision of registration form and submission of the same electronically by 31 December
2020.
OTHER AMENDMENTS MADE THROUGH THE AMENDMENT ORDINANCE
- Has the Amendment Ordinance allowed exemption from “Capital Gains” on disposal of immovable
property to incentivize the construction industry?
Yes, the newly inserted Clause (114AA) in Part I of Second Schedule to the IT Ordinance, through the Amendment Ordinance provides that “Capital Gains” derived by a resident individual from the sale of a constructed residential property will be exempt from tax subject to the following conditions:-
(a) At the time of sale, constructed residential property was being used for personal accommodation by such
resident individual, his spouse or dependents and for which any of the utility bills is issued in the name of such resident individual;
(b) The land area of such constructed residential property (i) in case of a house, does not exceed five hundred
(500) square yards and (ii) in case of a flat, does not exceed four thousand (4,000) square feet; and
(c) Exemption under this Clause has not been previously availed by such resident individual, his spouse or
dependents.
In view of the above, we are of the opinion that since there would be no tax liability of capital gains on sale of aforementioned property; as such, corresponding amendment for withholding of advance tax under Section 236C of the IT Ordinance (imposed on seller) should also be made accordingly.
- What reduction of tax has been provided under the Amendment Ordinance on sale of immovable
property by way of an auction?
Presently, Section 236A of the IT Ordinance requires any person selling by public auction or auction by a
tender of any property, such person shall collect tax at the rate of ten percent (10%) of the gross sale price.
However, Division VIII, Part (IV) of the First Schedule to the IT Ordinance has now been amended by
Frequently asked questions on Tax Laws (Amendment) Ordinance 2020 22
insertion of a proviso which provides that in case of sale of immovable property by way of an auction, the
rate of tax will be reduced from present ten percent (10%) to five percent (5%) of the gross sale price.
- What amendments have been made regarding Non-Imposition of Capital Value Tax under the
Amendment Ordinance?
Amendments have been made to Section 7(1) of the Act 1989 as a result of which capital value tax will not be payable on the following:
(a) Purchase of an asset, right to use thereof for more than twenty years or renewal of lease, or any premium
paid;
(b) Purchase, gift, exchange and time bound (not exceeding sixty days) executed between spouses, father
and son or daughter, grandparents and grandchildren, brother and sister;
(c) Surrender or relinquishment of rights by the owner (whether affected orally or by deed or obtained through
Court decree) except by inheritance or gift from spouse, parents, grandparents, a brother, and sister; or
(d) Purchase of modaraba certificate or a registered instrument of redeemable capital or a share of a public company, listed on a registered Stock Exchange in Pakistan by a resident person.
Please note that imposition and collection of capital value tax is a provincial matter under the Constitution of Islamic Republic of Pakistan 1973. Therefore, the amendments made through Section 7(10) of the Act 1989 will only apply to transfers made in Islamabad Capital Territory. Such change will not be applicable to capital value tax payable to provincial authorities until such time that the relevant provincial legislation is amended, and the changes introduced in Section 7(1) of the Act 1989 are adopted. Please note that the Government of Punjab and Government of Khyber Pakhtunkhwa have made amendments to the relevant provincial legislation adopting the exemptions provided by the Federal Government of payment of Capital Value Tax. We have reasons to believe that Sindh will also do the needful.
