FBR issues circular: Cooperative housing societies to pay taxes

ISLAMABAD: The Federal Board of Revenue (FBR) on Monday declared Cooperative Housing Societies (CHS) as Company for tax purposes and directed all its field formations to ensure filing of returns on the basis of audited accounts on accrual basis in order to get due share in tax collection.

The FBR issued a fresh circular number 3, 2022 here on Monday and directed that all formations are expected to look into and finalize CHS cases for all pending and reopened tax years in the light of this circular, so that decent revenues could be ensured for the state, and rent-seeking and compliance costs could be cut for taxpayers, in the process sparing their management to single mindedly focus on resolution of housing problems for the people.

All earlier circulars and instructions issued on the matter stand rescinded.This circular stated that taxation of Cooperative Housing Societies (CHS) registered under the Cooperative Societies Act, 1925, has historically faced challenges majorly on three counts.

One, real estate development projects, per se, take a lot longer time to complete than normal projects, thereby creating difficulties in the recognition of revenues and expenses.Two, most CHSs have been claiming exemption from tax under “Doctrine of Mutuality”, implying none could earn income or profit by transacting with itself.

Three, the diverse treatment meted out to CHSs’ across formations has led to conflicting case laws, further complicating the scenario. These challenges have cumulatively resulted in below par revenue outcomes for the exchequer, and increased compliance costs for CHSs with legal actions being stuck in appellate courts for decades.

There is little doubt that all incomes accruing to a CHS on any count are taxable - including “advances from customers” or consideration received against sale or booking of plots and other pieces of land. However, most CHSs do not recognize their receipts from members against sale or booking of plots as revenues in trading account, and instead, directly transfer them to balance sheet and offset them against “cost of land” or “development expenditure.” Likewise, P&L account items i.e. incomes arising from heads like “membership fee,” “transfer fee,” “surcharge & fines” etc. are offset against “management expenses.” The result of these accounting tricks is that CHSs as a sector ends up contributing no or negligible revenues to the exchequer.

The Section 32(2) of the I.T.O. 2001 mandates a CHS due to its being “company,” to “account for income chargeable to tax” under the head ‘Income from Business’ on an accrual basis.