Karachi, July 30, 2024 – The Federal Board of Revenue (FBR) has issued comprehensive tax guidelines for builders and developers in light of the amendments introduced through the Finance Act, 2024, to the Income Tax Ordinance, 2001.
These guidelines aim to streamline the taxation process and provide clarity on the tax obligations for builders and developers in Pakistan.
The FBR issued Circular No. 01 of 2024-25 of Income Tax, which explains the significant amendments made to the Income Tax Ordinance, 2001, through the Finance Act, 2024. One of the key changes is the introduction of Section 7F, specifically addressing the taxation of builders and developers.
Key Provisions of Section 7F
Taxable Profit Rates:
• Construction and Sales of Buildings: The taxable profit is set at 10% of the gross receipts from activities involving the construction and sale of residential, commercial, or other buildings.
• Development and Sales of Plots: The taxable profit is set at 15% of the gross receipts from activities involving the development and sale of residential, commercial, or other plots.
• Combined Activities: For activities involving both construction and sales of buildings and development and sales of plots, the taxable profit is set at 12% of the gross receipts.
The tax shall be imposed on the taxable profit at the rates specified in Division I or Division II, as applicable, for such persons.
Scope of Section 7F
The FBR clarified that the provisions of Section 7F apply exclusively to activities related to the construction and sale of residential, commercial, or other buildings and the development and sale of residential, commercial, or other plots. Income from any other sources or heads is excluded from the purview of this section.
Builders and developers, when explaining the nature and source of any credited amount, investment, money, or valuable articles owned, or funds from which expenditures were made, shall be allowed to take credit up to the amount of taxable profit under this section. Credit for amounts exceeding the taxable profit can only be taken if the taxable income under Section 9 of the Income Tax Ordinance, 2001, exceeds the taxable profit, and tax has been paid on such taxable income at the specified rates in Division I or II of Part I of the First Schedule of the Income Tax Ordinance, 2001.
Entities established by an Act of Parliament, a Provincial Assembly, or a Presidential Order for the benefit of their employees or specific housing projects are excluded from the purview of Section 7F.
Advance Tax Liability
According to sub-section (1) of Section 147 of the Income Tax Ordinance, 2001, individuals deriving income subject to tax under sections 5, 6, and 7, salary income subject to tax deduction at source, and income subject to final tax are not required to pay advance tax. However, Section 7F is not included in the exclusion from payment of advance tax in sub-section (1) of Section 147. Therefore, builders and developers falling under Section 7F must fulfill their advance tax liability on taxable profit for a tax year in four quarterly advance tax installments.
Given that the advance tax liability for the tax year 2025 is expected to be higher than the liability computed under sub-section (4), builders and developers must estimate their advance tax liability as per the provisions of sub-section (4) of Section 147. The advance tax for a quarter will be computed by applying the rates specified in Division I or II of Part I of the First Schedule to quarterly taxable profit, calculated as a percentage of gross receipts: 10% for construction and sales activities, 15% for development and sales activities, and 12% for combined activities.
The due dates for payment of quarterly advance tax for individuals and AOPs/companies will remain the same as specified in sub-sections (5) and (5A) of Section 147 of the Income Tax Ordinance, 2001. Furthermore, the provisions of sub-sections (7) to (10) of Section 147 will apply mutatis mutandis to quarterly advance tax payable under this section.
Submission of Computation Statement
Builders and developers are required to submit a statement of computation on each due date for the quarters, specifying the computation of advance tax based on taxable profit for each quarter, the gross amount of receipts either in cash or deposited in the bank, and details of business bank accounts. This statement must be duly certified by a Chartered Accountant or a Cost and Management Accountant.
These guidelines and the detailed explanation provided by the FBR are expected to facilitate compliance and ensure a more structured tax payment process for builders and developers, ultimately contributing to the broader goal of increased transparency and efficiency in the tax system.