FBR issues tax recovery procedures from cooperative housing societies

Shahnawaz AkhterWeb Editor

05th Jul, 2021. 05:14 pm
FBR

KARACHI: The authorities on Monday issued a taxation procedure for the transaction made by cooperative housing societies and directed the tax offices to ensure recovery of the past years against the sales and purchases by the same, a circular issued on Monday said.

“All Formations are expected to look into and finalise CHS [cooperative housing societies] 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 [the] taxpayers, in the process sparing their management to single mindedly focus [on the] resolution of housing problems for the people,” the Federal Board of Revenue said.

It said the taxation of cooperative housing societies registered under the Cooperative Societies Act, 1925, has historically faced challenges – majorly on three counts.

One, the 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 of the cooperative housing societies have been claiming tax exemption under “Doctrine of Mutuality”, implying none could earn income or profit by transacting with himself.

Three, the diverse treatment meted out to the cooperative housing societies across the tax offices 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 the cooperative housing societies with legal actions being stuck in the appellate courts for decades.

The revenue board said it was imperative to evolve a uniform formula for taxing the cooperative housing societies. The revenue body also said under section 23 of the Cooperative Housing Societies Act, 1925 (as may be adapted by provinces), a cooperative housing society upon registration becomes “a body corporate by the name under which it is registered, with perpetual succession and a common seal, and with [the] power to hold property, to enter into contracts, to institute, and defend suits and other legal proceedings.”

The Section 80 (2) (e) of the Income Tax Ordinance, 2001 (ITO 2001), likewise, classifies a cooperative housing society as a company for taxation purposes. Thus, there is no doubt or dispute that a cooperative housing society is to be treated as a company for action under the ITO 2001.

The FBR said in view of the inherent hurdles in the way of enforcing tax laws on the real estate sector, in particular, and the cooperative housing societies in general, attempts have been made to devise methods to extract, if not actual due, at least, reasonable revenues from them.

In this connection, the circular No 02 of 1975 was issued, prescribing computation of the real estate sector projects on provisional basis of actual receipts and accounts. Upon completion; however, the total profits of the projects were to be recomputed and reassessed in the relevant years. This method was validated in the Creek Marina case reported as ITA No 205/KB/2009 ATIR at 15 per cent gross profit rate.

Likewise, the section 36 of the ITO 2001 prescribes percentage of completion method vis-à-vis long-term contracts; whereby, the income chargeable to tax during the year is to be worked out on the basis of costs incurred.

This method has also been upheld in the Twin City Housing (Pvt) Ltd reported as PTD 1918 ATIR, which is widely relied upon to frame assessments. However, the adoption of different methods have led to different problems.

Accordingly, to ensure proper execution of tax laws and to extend hassle-free tax services to the cooperative housing societies and abate the pangs of prolonged and protracted audit proceedings, two alternative methods or options are being devised with both having direct or indirect judicial or parliamentary validations.

A cooperative housing society may avail of one of the two following methods for amicable settlement of its case:

Hybrid GP-NP Rate Method

Under the hybrid method, a GP rate of 15 per cent would be applied on the total trading account receipts (or advances) booked against sale of plots during the year or at a future date implying that 85 per cent of the trading account expenses stand allowed. (Most times, this item would have to be taken from the balance-sheet as it is directly posted there.)

The resultant GP amount would be taken to P&L account and added to P&L account receipt heads by allowing P&L expenses, subject to the condition that P&L expenses would not exceed the P&L incomes and receipts.

Fixed Tax Rate Method

In 2020, the government of Pakistan launched Naya Pakistan Housing Scheme. The scheme carried fixed (lower) tax rates for taxation u/s 100D of the ITO 2001, as an incentive so that more and more people could benefit from it.

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