• Punjab property registries stalled over tax policy disputes.
• Developers face liquidity crisis amid tax disputes.
• Housing societies demand relief from first-sale taxation.
  

ISLAMABAD: The real estate sector in Sindh and Punjab is facing mounting pressure “developers and housing societies are being subjected to double taxation” during property registration at the initial allotment stage, The News reported.

This taxation dispute has resulted in a deadlock in issuing numerous property registries across Punjab. The impasse stems from provincial tax authorities’ interpretation of Section 236C of the Income Tax Ordinance, 2001, which they argue applies to housing societies and developers, creating uncertainty and delays in property transactions.

Hassan Bakhshi, the chairman of the Association of Builders and Developers of Pakistan (ABAD), highlighted the issue while speaking to The News. He said that many registries are currently pending before the sub-registrars. 

According to him, the Board of Revenue (BOR), Punjab, and the Punjab Land Revenue Authority (PLRA) have taken the stance that Section 236C of the Ordinance applies to allotment registries as well. 

As a result, housing societies are being required to pay withholding tax under this provision. “This has exposed the real estate sector to double taxation,” he said.

According to him, the Board of Revenue (BOR), Punjab, and the Punjab Land Revenue Authority (PLRA) have taken the stance that Section 236C of the Ordinance applies to allotment registries as well. As a result, housing societies are being required to pay withholding tax under this provision. He warned that this interpretation has led to double taxation for the real estate sector.

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 the transfer of immovable property. 

Allotment of property pertains to the first sale of immovable property by developers whereas transfer of property pertains to the subsequent transfer of titles from purchasers to sellers.

However, the 236K clause of the 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 instalments. 

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 the 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 the first sale or first registry of plots 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 get special permission from the commissioner for refund payments. Owing to these issues, real estate is facing a liquidity crisis, he added.

When contacted, Zaman Watto, who is a Tax Member Punjab Board of Revenue, said that the 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 the sub-registrar for registry purposes, then the Punjab BoR jurisdiction does not apply, but when it comes to the 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 the first sale on allotment level. 

Watto, however, said that 236C does not apply to a seller dependent on 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 the 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 the PM Task Force on real estate, said that the Punjab tax authorities started taxing developers on the first sale at the time of registration three to four 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 the 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 and personnel who died during services of Armed Forces, Federal and Provincial Govts (i.e. DHAs, FGEHA or any other Statutory Body). 

It clearly manifests that the allotment is the first sale of immovable property by the developer which has been kept outside the 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 a 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 the first sale of the property (after its partition/sub-division) by the Developers whereas the Transfer of property denotes 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 sections 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 the imposition of taxes u/s 236C as the income emanating from the resale of the plot would be termed as capital gain of the housing society, not as business income.

The industry also says that the primary purpose of Section 236C is to capture tax on subsequent transactions that are tantamount to income from capital gains. 

The allotment/first sale of immovable property by the 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 for withholding of tax under this section whereas the IRIS system does not allow be withholding agent to be the same person as the 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.