FBR Tax Recovery Scheme

By 09/07/2021 0 Comments

In a bid to bring residential real estate societies into the tax bracket, the Federal Board of Revenue (FBR) has issued a directive under Circular, No. 03 of 2021, which states that Cooperative Housing Societies (CHS), registered under the Cooperative Housing Societies Act, 1925, are liable to pay Income tax as the CHS is registered as a business under the Income Tax Ordinance, 2001. In other words, due to its corporate nature, the ordinance mandates a CHS to account for income chargeable to tax under the heading “Income from Business” on an accrual basis.

Housing Cooperatives intend to provide better and cheaper houses to low and middle-income groups, who otherwise cannot afford a house. CHS functions on the principle of self-help, self-finance, mutual aid and self-governance. However, these housing societies are liable to pay income tax on the income generated from their business. Therefore, the income derived by cooperative societies from the sale of goods, immovable property or the provision of services to its community members is liable to tax under the provisions of the Income Tax ordinance.

However, the FBR faces numerous legal and administrative challenges for the collection of income taxes from CHS. Firstly, most CHS claim exemption from income tax because they work based on the principle of “Doctrine of mutuality”, which implies that no individual or entity earns profit or income as the CHS conducts transactions with itself. Secondly, real estate development projects take time to be completed which creates challenges in identifying the revenues and expenses of the given CHS. The different types of methods applied to evaluate the expenses of CHS across the country have led to conflicting case laws which complicate the overall situation.

In Pakistan, a single major city like Lahore has hundreds of Cooperative Housing Societies functioning at a time, providing housing to millions of people. FBR needs to come up with prudent taxation policies for this model of housing which is providing houses to the low and middle income demographic.

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