KARACHI: Builders and developers are required to discharge tax liability for tax year 2020 with the tax return.
Commenting on Tax Laws (Amendment) Ordinance, 2020, tax experts at PwC A Ferguson said that the annual tax liability for a project is to be computed by dividing the total liability of the project under the regime by the estimated life of the project in years (which shall not exceed 2.5 years). For existing incomplete projects, estimated life of such projects is considered as 3 years from tax year 2020 through tax year 2022.
Tax payable in respect of existing incomplete projects will be reduced by the percentage of completion up to the last day of the accounting period pertaining to tax year 2019 as declared in the registration form to be filed with Federal Board of Revenue (FBR).
Tax liability under this regime is to be computed as per the rates provided under Rule 11 of the Eleventh Schedule to the Ordinance separately for builders and developers, which are based on the area of the Project and location (Annexure A).
In case of mixed use of buildings having both commercial and residential areas, respective rates will apply. In case of development of plots and constructing buildings on the same plots as one project, both the specified rates shall apply.
Clause (9B) has been inserted in Part III of the Second Schedule to the Ordinance, which provides for a reduction of 90% of 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. In case of development of plots and constructing buildings on the same plots as one project, in case of ‘low cost housing’ and all projects developed by NAPHDA, the higher rates shall apply.
Advance tax provisions of section 147 of the Ordinance are also applicable with the requirement to pay advance tax equal to one fourth of the annual tax liability in four equal installments.
As the tax liability for tax year 2020 is required to be discharged with the tax return and three quarters have already elapsed, it appears that the advance tax provisions will be applicable from tax year 2021.
Builders and Developers covered by the special tax regime are absolved from the obligation as a payer to withhold tax under section 153 of the Ordinance on following payments:-
a) purchase of materials (except steel and cement); and
b) services (plumbing, electrification, shuttering and other similar and allied services) which are provided by non-corporate service providers.
Dividend income paid out of the profits and gains derived from an eligible project by the builder or developer being a company will be exempt from tax and a specific exemption from withholding tax provisions of section 150 have also been provided therefor.