COMMENTS ON TAX LAWS (AMENDMENT) ORDINANCE, 2020

The information contained in this booklet has been prepared on the basis of Tax Laws

(Amendment) Ordinance, 2020 and is not intended to be advice on any particular

matter. No person should act on the basis of any matter contained in this publication

without seeking appropriate professional advice. The booklet is published for our

clients and staff for information and guidance only and should not be published or

reproduced without prior permission of the firm.

This document can be accessed on www.hzco.com.pk

REANDA HAROON ZAKARIA & COMPANY

Dated: April 18, 2020

Preamble

The purpose of this Ordinance is to provide relief package to construction industry

by way of promulgation of Tax Laws (Amendment) Ordinance, 2020 vide dated

April 17, 2020 to provide boost to economic activity.

Applicability

The Ordinance intends to provide relief to all persons namely individual or Companies

and Partnerships registered under Companies Act, 2017 and Partnership Act, 1932

respectively as single object status of builder or developer.

However, the benefits under this Ordinance shall not be available to holder of public

officer as defined in Voluntary Declaration of Domestic Asset Act 2018 or his

benamidar as defined in the Benami Transactions (Prohibition) Act, 2017 or his/her

spouse or dependent.

Definitions

“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;

“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

“new project” means a construction or development project, which –

(i) is commenced during the period starting from the date of commencement

of the Tax Laws (Amendment) Ordinance, 2020 and ending on the 31st day of

December, 2020; and

(ii) is completed on or before the 30th day of September, 2022

“existing project” means a construction or development project, which –

(i) has commenced before the date of commencement of the Tax Laws

(Amendment) Ordinance, 2020;

(ii) is incomplete;

(iii) is completed on or before the 30th day of September, 2022; and

(iv) 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;

“commencement of project” means,–

(i) in case of a construction project, when layout plan is approved by the

concerned authority; and

(ii) in case of a development project, when the development plan is approved

by the concerned authority:

Provided that where the builder or developer has 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 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;

“completion of project” means. -

(i) in the case of a builder, the date on which the grey structure is completed:

Provided that such grey structure shall only be considered as completed

when the roof of the top floor has been laid as per the approved plan;

(ii) in the case of a developer, the date on which –

(A) at least 50% of the total plots have been booked in name of buyers;

(B) at least 40% of the sale proceeds have been received;

(C) landscaping has been completed; and

(D) at least 50% of the roads have been laid up to sub-grade level as

certified by the approving authority or NESPAK;

“unit” means a self-contained or independent building or part thereof including

houses, apartments, shops, offices, etc.

“commercial building” includes any building or part thereof which is to be used for

commercial purposes in accordance with the relevant laws;

“Residential Building” means any building which is not a commercial building but does

not include buildings used for industrial purposes.

Scope

This Ordinance shall apply on both to new project as well as existing project subject

to the condition that project is completed on or before 30th day of September 2022.

Relief

- There shall be no question asked about the source of investment being capital

investment from the individual, partners or shareholders of the new project if the

amount is invested before 31st December 2020 and is utilized wholly in a construction

or development project completed on or before September 30, 2022.

- The immunity shall also be available to the first purchaser in a project if the purchase

is made on or before the 30th day of September, 2022. However, no immunity shall

be available to subsequent or substituted purchaser.

- The builder and developer shall not be required to withhold taxes under section 153

and 150 of the Income Tax Ordinance, 2001 on;

i) Purchase of building material except cement and steel

ii) services of plumbing, electrification, shuttering and other similar services

other than those provided by companies.

iii) Distribution of dividend to its shareholders in case of a Company.

- The Ordinance also provides exemption from CVT on transfer of immovable property

situated in Islamabad Capital Territory.

- Through this Ordinance, persons engaged in construction activity has been included

in the definition of industrial undertaking starting from 1st May, 2020 thus providing

them benefit of exemption of income tax on import of construction machineries

subject to exemption certificate issued by Commissioner Inland Revenue.

- Dividend income from companies has been declared as exempt.

- To reduce tax liability in case of profits and gains derived from projects of low cost

housing developed or approved by Naya Pakistan Housing and Development

Authority or under the Ehsaas Programme by ninety percent.

- No minimum tax or alternate cooperate tax under section 113 and 113C of the

Income Tax Ordinance, 2001 shall be chargeable to companies paying fixed rate of

tax under this Ordinance.

- Further the Ordinance to provides one time exemption from capital gain for

individuals who have derived income from sale of residential property used for

personal accommodation not exceeding 500 square yard or 4000 square feet in case

of a flat.

- The completion of project in case of developer shall be certified by satisfactory rated

QCR firm of ICAP that fifty percent of the plots have been booked and forty percent

of the sale proceeds has been received.

- The rate of tax for collection of tax under section 236A of the Income Tax Ordinance,

2001 has been reduced to 5% on auction of immovable property.

Conditions

- The income of the project shall be chargeable to tax on project by project basis at

fixed rate on the basis of area of the project which shall be final tax liability. No

deduction or deductible allowance will be claimed against income of the project nor

any refund or tax credit except for tax under section 236K of the Income Tax

Ordinance, 2001 shall be allowed.

- Builders and developers intending to take benefit of this Ordinance shall be required

to be registered with FBR on project by project basis through online portal of FBR.

The registration shall be irrevocable and shall be made on or before 31st December,

2020. Further, the existing project shall also declare the percentage completed as of

30th June 2019 along with above prescribed registration form under this Ordinance.

- In case the project is being undertaken by AOP or Company, the same shall be

registered Partnership Act, 1932 or Companies Act, 2017 as the case maybe after

the commencement of this Ordinance.

- The builder or developer availing benefit under this scheme shall furnish certificate

to the board from approving authority or NESPAK as the case maybe, certifying total

land area, covered area, saleable area and type of total saleable area or the total

land area in the project.

- Any person claiming immunity from explanation of source of investment shall make

investment on or before 31st December 2020, in the following manner:

i) In case the investment is in form of money, the same shall be deposited in

newly opened designated bank account of the individual and in case the

project is undertaken as AOP or Company, the same shall be deposited in

the bank account of AOP or Company as the case maybe through crossed

banking instrument; or

ii) In case the investment is made in the form of land, the person shall have

the ownership title of the land at the time of commencement of this

Ordinance and where the project is undertaken as AOP or Company, the

title of such property shall be transferred to such AOP or Company, as the

case may be.

- The above benefit of immunity to explain source of investment shall also be available

to first purchaser of a unit from builder or purchaser of plot from developer if the

investment is made in the following manner:

i) In case of a unit is purchased from builder, full payment in case of new

project or full or balance payment in case of an existing project is made

through crossed banking instrument to the builder from the date of

registration of project by the builder but not later than September 30, 2022.

ii) In case of purchase of plot from developer for construction of building, the

same conditions shall apply on the purchaser of the plot as if it applied on

the builder for construction of building.

- The value of property for the purpose investment shall be higher of 130% of fair

market value as determined by FBR or the lower of the values as determined by at

least two independent valuers from the list of valuers approved by the State Bank of

Pakistan.

- The ownership structure of partners and shareholders of the project shall not be

changed in case of incomplete project unless fifty percent of the total project cost as,

certified by a firm of chartered accountants having an ICAP QCR rating of

‘satisfactory’, is incurred on the project. Further the substituted partner shall not be

eligible for immunity to explain source of investment.

- Advance tax liability shall be discharged in four equal installments in accordance with

section 147.

- The builder or developer shall be entitled to take credit of income in books of accounts

to the extent of ten times the amount of tax only.

- Where any declaration is required to be made under this Ordinance, has been made

through misrepresentation or suppression of facts, such declaration shall deemed to

be void.

Rate of tax

The rate of tax shall be as follows:

Area (A) Karachi, Lahore and Islamabad

(B) Hyderabad, Sukkur, Multan,

Faisalabad, Rawalpindi, Gujranwala,

Sahiwal, Peshawar, Mardan,

Abbottabad, Quetta

(C) Urban Areas not specified in

A and B

TAX ON BUILDERS FOR COMMERCIAL BUILDINGS

Area in Sq. Ft.

Rate/ Sq. ft.

Any size Rs.250 per sq. ft

Rs.230 per sq. ft

Rs.210 per sq. ft

FOR RESIDENTIAL BUILDINGS Area in Sq.

ft. Rate/ Sq. ft.

upto 3000 Rs.80 per sq. ft

Rs.65 per sq. ft Rs.50 per sq. ft

More than 3000 & above

Rs.125 per sq. ft

Rs.110 per sq. ft

Rs.100 per sq. ft

TAX ON DEVELOPERS (ENTIRE PROJECT) Area in Sq.

Yds. Rate/Sq. Yd

Any size Rs.150 per sq. yd

Rs.130 per sq. yd

Rs.100 per sq. yd

FOR DEVELOPMENT OF INDUSTRIAL AREAS Area in Sq.

Yds. Rate/Sq. Yd

Any size Rs.20 per sq. yd

Rs.20 per sq. yd Rs.10 per sq. yd

However, in case of existing incomplete projects opting to pay tax on above fixed

rate basis, the tax payable shall be reduced by the percentage of completion up to

the last day of the accounting period pertaining to tax year 2019.

The area of the project will be calculated on total saleable area in case of commercial

building and total covered area in case of residential building. However, in case of

mixed use buildings having both commercial and residential areas, respective rates

shall apply.