Builders and Developers to Pay Advance Tax on Constructing and Selling Plots and Buildings

New tax measures to hit builders, developers and fertiliser sales

The government of Pakistan has introduced new taxation measures through the Finance Act 2023 in an attempt to revive the International Monetary Fund (IMF) program. These measures will impact builders, developers, and sales of DAP fertilizers.

The amendments include the implementation of an advance income tax on builders and developers, as well as the imposition of a 5% sales tax on DAP fertilizers. The government aims to generate an additional PKR 215 billion in taxes through these measures.

For builders and developers, income derived from constructing and selling residential, commercial, or other buildings, as well as developing and selling plots, will now be subject to adjustable advance tax on a project-specific basis. This tax must be paid in four equal installments throughout the tax year, based on the new tax rates.

To avail of the exemption from tax on deemed income under section 7E, individuals must file their tax return and be listed as active taxpayers. Additionally, anyone involved in registering, recording, or attesting the transfer of immovable property must ensure that the seller or transferor has fulfilled their Section 7E liability and provide evidence of this fulfillment.

The exemption initially granted to overseas Pakistani buyers or transferees from advance tax has been reversed, along with the withdrawal of the tax credit for house construction mentioned in the budget speech.

All types of fertilizers, including DAP, are now subject to a 5% federal excise duty. The government has also reinstated the sales tax rate on services in the federal capital to 15%, reversing the previous reduction to 5%.

The increase in the annual turnover limit for Small and Medium Enterprises (SMEs), including IT or IT-enabled services in the definition of SMEs, has been reversed to the pre-budget level. The tax on windfall income, profit, or gain now applies only to companies and will be applied retrospectively for three years instead of the previous five years.

An alternative dispute resolution committee will be established for cases where the tax liability amounts to PKR 100 million or more.

Other changes include raising the threshold for zero-rating of preparations for infant milk for retail sale to PKR +600 per 200 grams. Certain exemptions initially introduced in the budget speech have been withdrawn, such as exemptions on contraceptives, related accessories, saplings, and agricultural equipment. However, the exemption on wheat bran has been allowed retrospectively since July 1, 2018.

Furthermore, the fixed tax of 1% and restriction on input tax adjustment have been extended to the supply chain in the case of drugs and raw materials of Active Pharmaceutical Ingredients. Previously, the fixed tax regime only applied to importers and manufacturers.

These measures, while aiming to meet IMF requirements, may have significant implications for builders and developers in Pakistan.

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