This Blog is written by Mr. Sharif ud din Khilji, FCA, Partner/ Chief Executive, Khilji & Co. Chartered Accountants. Please read this blog and provide us your valued comments.
ANOMALIES IN CONSTRUCTION AMNESTY SCHEME
- The construction sector entities are declared “industrial undertaking” only for the purpose of import of plant & machinery. Other sectors who fall within the definition of “industrial undertaking” have no such limitation and they can also import raw material, equipment and parts for own use.
- It is further interesting to note that Honorable High Court and Appellate Tribunal Inland Revenue (ATIR) gave some decisions the interpretation of which appear to suggest that builders and developers were already “industrial undertaking” as per definition provided in Income Tax Ordinance, 2001. The scope & interpretation of aforementioned Court decisions provided a wider benefit to builders & developers and the current change has effectively reduced that benefit.
- Accordingly, the changes in definition of “industrial undertaking” need to be revisited to provide real relief to construction sector and bring them at par with the relief available to all other industrial undertakings.
- The timelines provided to complete a new project appear to be very strict and unrealistic particular considering the general hurdles faced by the builders & developers under the current environment when sometimes getting an electricity connection could become an uphill task.
- Either the timeline may be relaxed for at least a year or the percentage of completion by September 30, 2022 may be relaxed.
Immunity to purchaser of building or unit of building
- Section 111 allows tax department to ask source of investment from a buyer and the relief package provides immunity from section 111 of Income Tax Ordinance, 2001 to first purchaser of building in respect of a project registered under this scheme.
- However, it is not very clearly spelt out in the law that if such registered project fails to get completion within the timeline then the immunity available to purchaser would still remain intact or the failure of project would lead to adverse consequences for such first purchaser as well. Logically, the incomplete project is not the fault of purchaser of building or unit of building so it should not be fatal to his immunity but this need to be spelt out more clearly in the law that failure of project to meet completion deadlines would not impact immunity available to first purchaser.
- The immunity also requires the purchaser to make full payment by September 30, 2022. However, in case of failure of project to be completed within the timelines, this could be detrimental to the investment of purchaser because the first purchaser would have made all the payments and the builder may not complete the project for years to come hence the investment of purchaser would get stuck. A caveat may be allowed to first purchaser that in case of incomplete project he can make proportionate payments though amnesty would only be available to payments made during the period identified in the relief package.
Immunity to purchaser of plot
- It is interesting that immunity in case of purchaser of building or unit of building is available only for registered projects under the relief package however in case of purchaser of plot the immunity is available if investment is made anywhere i.e. even in projects not registered.
- This is fine if the Government wants people to invest in plots with the intention to construct building but then same is true for purchaser of building or unit of building and he should also be allowed immunity even if he purchases unit other than a registered project under relief package.
- The immunity also required purchaser of plot to construct a building however what constitutes a building for this immunity is unclear. If a person builds a single room on a 4 kanal plot and left all remaining open for gardening, would that be acceptable as constructed building? Law is apparently silent on this and need to be elaborated further.
Condition of utilization of money on the project to avail immunity
- The law requires that to avail immunity, the money should be wholly utilized in the project however this requirement may be further clarified as it can be used to exploit the amnesty scheme by investors and is also open to misinterpretation by tax officer.
- For example, if a builder gets his own salary or pays salary to his immediate family then tax officer may draw inference that the amount is not wholly utilized on the project rather used for personal benefit though the payment of such salaries may be genuine on account of work performed.
- On the other hand, this can be used as a tool to whiten a lot of money. For example, a project may be of real worth say Rs. 100 million and it is declared under the amnesty at Rs. 250 million. Actual cost of construction is less and the exceeding amount is withdrawn in the form of salaries etc. to whiten the money and the amounts are not utilized in real generation of business activity.
- Accordingly, utilization of money may be further explained limiting the salaries/ dividends of builders/ developers & their families to a certain percentage of construction costs. The estimates submitted for the project may be required to be reviewed by a Chartered Accountant firm to be reasonable estimates for such projects.
Limitation of Immunity for certain persons
- The law prohibits availability of immunity for persons Voluntary Declaration of Domestic Assets Act 2018.
- The said law of 2018 prohibits persons who have been in certain position for the past ten years i.e. the persons who have been in those positions from 2008 and onwards were eligible under the 2018 amnesty scheme.
- The adaptation of definition from the said 2018 law should logically mean that the calculation of past ten years should apply from the date of current law i.e. a person who held any such position prior to April 2010 but not after that should be eligible for the relief package however more clarity should be provided because there is apprehension that tax officer may interpret that calculation of ten years should start from date of 2018 which would make persons from 2008 to 2010 also ineligible for this relief package.
No Credit allowed except section 236K
- This could be pretty harsh particularly in case of taxes paid under section 236A on property or goods purchased in auction.
Exemption from application of section 153
- Clarity is required if this exemption is applicable to all builders & developers or only to those who are registered under section 100D. In my opinion, plain text appears to suggest that it should be applicable to all but more clarity would be helpful in avoiding unnecessary litigation
Sharif ud din Khilji
Partner/ Chief Executive
Khilji & Co. Chartered Accountants
May 9, 2020