Real estate subjected to 'double taxation': ABAD

ISLAMABAD: The real estate industry in both major federating units—Sindh and Punjab—is under duress as “developers and housing societies are being subjected to double taxation” at the time of property registry as a first sale on allotment stage.

This has led to a stalemate in the process of issuing a vast number of property registries in Punjab because of the questionable interpretation by tax authorities in the provincial government about the applicability of Section 236C of the Income Tax Ordinance, 2001 on housing societies and developers.

Hassan Bakhshi, the chairman of the Association of Builders and Developers of Pakistan (ABAD) while talking to The News highlighted the issue saying that a large number of registries are pending before the sub-registrars where the Board of Revenue [BOR], Punjab, and Punjab Land Revenue Authority [PLRA] have come with a notion that the provision of section 236C of the Ordinance is applicable on allotment of registries as well and required the societies to pay the withholding tax u/s 236C of the Ordinance. “This has exposed the real estate sector to double taxation.”

It is pertinent to mention that tax under section 236K is applicable on the transfer and allotment of immovable property; however, the tax under section 236C is applicable only on transfer of immovable property. Allotment of property pertains to first sale of immovable property by developers whereas transfer of property pertains to the subsequent all transfer of titles from purchasers to sellers.

However, 236K clause of Income Tax Ordinance, 2001 says that tax is not applicable on the first sale or first registry provided that where tax has been collected along with the installments. No further tax under this section shall be collected at the time of transfer of property in the name of the buyer from whom tax has been collected in installments which is equal to the amount payable in this section.

Bakhshi said that taxing developers and housing societies at the time of first sale is unjustified as they pay taxes under section 7-F, but the provincial authorities also charge the taxes from them at the time of first sale or first registry of plot or flat which is equal to double taxation.

He said that their tax refunds take time of one year to be cleared and sometimes these are not paid, and for next year, they have to take a special permission from the commissioner for refunds payments. Owing to these issues, real estate is facing liquidity crisis, he added.

When contacted, Zaman Watto, who is Tax Member Punjab Board of Revenue, said that sub-registrar is our withholding agent. Whenever the right of registry occurs, 236C is applied. He said even if it is the first registry after allotment, the seller will come under 236C jurisdiction. However, if the housing society keeps the allotment with itself as a file and it does not come to sub-registrar for registry purpose, then the Punjab BoR jurisdiction does not apply, but when it comes for registry’s purpose even at an allotment level, 236C is applied.

He said they have had multiple meetings with FBR officials on this issue and they (Punjab Board of Revenue) stick to this interpretation. He said the transfer of rights as a registry whenever occurs, 236C is applied even at first sale on allotment level. Watto, however, said that 236C does not apply to a seller dependent of a Shaheed belonging to the armed forces or a person who dies while in the service of Pakistan armed forces or the federal and provincial governments.

Federal Board of Revenue (FBR) Spokesman Dr Najeeb Ahmed, when contacted, said that this issue is in the court of law and he is unable to respond on this particular issue. However, Ahmed said that this issue has been highlighted by the developers and the tax authorities will examine it in the next budget and will review it. However, in the same breath, he said that this issue has been explained in IT ordinance with clarity, but unfortunately it has been interpreted with various versions. Now the issue is in the court for interpretation purposes.

Sardar Tahir Mehmood, an eminent developer and member of PM Task Force on real estate, said that the Punjab tax authorities have started taxing developers on the first sale at the time of registration 3-4 months ago. Before that provincial tax authorities were not charging taxes from developers and housing societies on the first registry at the allotment phase.

Real Estate Industry argues that in first proviso to section 236C(1), the word allotment has appeared twice which provides that the first sale of allotted immovable property to the dependents of Shaheeds, war wounded persons & personnel died during services of Armed Forces, Federal & Provincial Govts (i.e. DHAs, FGEHA or any other Statutory Body). It clearly manifests that the allotment is first sale of immovable property by the developer which has been kept outside purview of withholding tax u/s 236C of the Ordinance.

In terms of SRO No. 1376(I)/2024 dated 05 September 2024 issued by FBR, the authorities have used the word allotment as first sale by the developers and transfer as subsequent transfer of titles from one person to another, which fortifies that claim that the provisions of section 236C applies only in the case of transfer, not allotment of immovable property.

In fact the Allotment denotes to the first sale of the property (after its partition/sub-division) by the Developers whereas the Transfer of property denotes to the sale of a specified immovable property from one person to another.

The allotment by the housing society represents the allocation or creation of initial ownership. This transaction is distinct from subsequent resale or transfer transactions (Transfers), which involve a change in ownership and are subject to advance tax under Section 236C. The allotment/first sale of immovable property is classified as business activity, generating taxable income for the housing society under relevant provisions dealing with taxation of “Income from Business” taxable u/s Sections 18 and 36 of the Ordinance which is why the Allotment/first sale of immovable property has been kept outside purview of tax u/s 236C on Developers to averse double taxation.

The allotment of immovable property by the Housing Society (being taxable under section 18 & 36 of the ITO, 2001) is distinct from subsequent resale or transfer transactions, which involve a change in ownership of the immovable property and are subject to advance tax under Section 236C. In case the Housing Society purchases the plot from the person they have sold and then resale it, these transactions would be subject to imposition of taxes u/s 236C as the income emanating from resale of plot would be termed as capital gain of the housing society, not as business income.

Industry also says that the primary purpose of Section 236C is to capture tax on subsequent transactions that tantamount to income from capital gains. The allotment/first sale of immovable property by developer is categorised under business income, which is taxed differently. The income chargeable in one head of income cannot be charged under any other head of income as per the ordinance.

On the premise of what has been mentioned above, 7E(2)(i) was inserted to exclude imposition of taxes u/s 7E on builders and developers as properties held by them for business use were excluded from imposition of taxes. This further reinforces the understanding that such withholding taxes are not intended to be borne by housing authorities or societies.

Housing societies are designated as withholding agents in terms of proviso to 236C(1) and responsible to withholding of tax under this section whereas the IRIS system does not allow to be withholding agent to be the same person as withholdee. Therefore, the intent of the legislature is very clear by not making the allotment/first sale of immovable property taxable; duly supported by the IRIS system.

It is deemed pertinent to mention that all withholding provisions of the ITO, 2001 related to business activities (sections 150, 151, 152, 153, 154, 154A, 155, 156, 233, 235, 236A, 236G, 236H, 236Y of the ITO 2001) are subject to imposition of taxes on percentage of revenue however the section 236C is of assessment nature where the taxes are imposed on value of property determined, irrespective of the revenue of the housing society.