House buyers to pay excise duty

[LRE]

House buyers to pay excise duty
SOHAIL SARFRAZ
ISLAMABAD (July 15 2008): A major shift in tax burden has been made through making amendments in Finance Act 2008 for collection of excise duty from the consumers/buyers of residential and commercial houses, etc, instead of directly collecting income tax from the influential real estate builders and developers.

Tax experts told Business Recorder on Monday that the government had imposed a direct tax on the developers/builders of plots/houses in budget 2008-09. The direct tax was converted into indirect tax through amendment in the Finance Act 2008. This change has shifted the tax burden from the developers and promoters to the general public engaged in buying of residential and commercial units.

Prior to the amendment in the Finance Act, developers had to deposit income tax directly from their own pocket. Income tax was a direct levy whereas excise duty was an indirect tax whose burden has to be passed on to the consumers. Later, an amendment was made in the Finance Act changing the mode of tax collection by charging excise duty from the purchasers instead of levying minimum tax on developers/promoters.

Now, tax burden has been shifted from developer to purchasers. At the time of sale of such property, excise duty has been included in the price of the unit, which is ultimately paid by the purchaser.

According to sources, change of taxation on property developers and promoters through amendments in the Finance Act 2008 would be instrumental in surpassing the projected revenue of Rs 2.5 billion from this head during 2008-09.

The FBR will not suffer any revenue loss due to withdrawal of minimum tax imposed on builders and developers engaged in the business of construction and sale of residential and commercial units. The withdrawal of minimum tax has not abolished their income tax to be paid by them.

Sources argued that imposition of excise duty would definitely affect the builders engaged in the business of construction/sale of residential/commercial units. The excise levy would have negative impact on the sale and profit margins of developers and promoters in the real estate sector. Due to levy of indirect taxes, the sale would be affected, causing direct impact on the developers and other engaged in such business. The excise levy would also have impact on the overall market situation. Thus, shifting of the burden of taxes from developers to purchasers would not benefit the developer community.

Secondly, the developers and promoters in the real estate business still have to pay the tax on their actual income. They further said that the rates have not been changed through amendment in the Finance Act. The same rates of excise duty would be applicable as in case of the previously imposed minimum tax. It was also difficult to pass on the burden of the proposed minimum income tax on developers to the deals already taken place before budget 2008-09.

Therefore, the minimum tax was substituted with the excise duty. Another problem with the minim tax was that the documented developers from UAE etc would have been paid the minim tax, but the enforcement issues could be raised in cases of un-documented developers and promoters in the real estate sector.

It is proposed that the builders engaged in the business of construction and sale of residential and commercial units are subjected to minimum tax @ Rs 50 per sq ft of total covered area constructed to be collected at the time of sale of the property. However, the developers engaged in development and sale of open plots be subjected to tax @ Rs 100 per sq yard of the developed plots at the time of sale/transfer of such plots.

When minimum tax was levied on developers in budget 2008-09, the FBR said that substantial investment has been made in the real estate sector. International companies from UAE have entered in this fast profit making field. However, the sectoral contribution towards income tax is not commensurate with the volume of business profits.

One of the reasons for low contribution is absence of a proper taxation mechanism. It was proposed that the builders engaged in the business of construction and sale of residential and commercial units are subjected to minimum tax @ Rs 50 per sq ft of total covered area constructed to be collected at the time of sale of the property.

However, the developers engaged in development and sale of open plots be subjected to tax @ Rs 100 per sq yard of the developed plots at the time of sale/transfer of such plots.

Later, through amendments in the Finance Bill 2008-09, the above said scheme was withdrawn and services of property developers and promoters have been subjected to federal excise duty by amendment in First Schedule. The development of plots shall be subject to FED at Rs 100 per square yard and construction of residential and commercial units shall be subject to FED at Rs 50 per square foot of covered area.

Copyright Business Recorder, 2008