Relaxation in Taxation During the Pandemic

During the COVID-19 pandemic emergency, states all over the world are concerned for their citizens and are trying to take active steps to ensure the effective circulation of finances in the appropriate sectors. The volatility and exhaustion of money for expenses has caused serious problems for masses around the globe. Every country in this time of need is providing the best possible, people-friendly solutions to curb the prospective shortage of finances. Pakistan, being a developing country, has also followed suit and attempted to introduce an ease in taxation through people-friendly procedures in tax laws to reduce the burden on taxpayers. It has also cut down the levy of tax for the construction industry. As many working class Pakistanis are labourers and daily-wagers, the government has tried to cater to the needs of the construction industry and, in turn, a significant part of the economy. By relaxing the lockdown for the construction sector, it has tried to grant construction workers an opportunity to earn. On 17th April 2020, the President of Pakistan, in order to effectively balance the needs of the general populace with the implementation of safety measures during the onset of the Coronavirus pandemic, promulgated the Tax Laws (Amendment) Ordinance 2020 while exercising the powers conferred under Article 89 (1) of the Constitution of the Islamic Republic of Pakistan 1973.

A new Section 100D has been introduced in the Ordinance which contains special taxation provisions relating to the construction industry. Under the provisions of the amended Ordinance, a fixed tax strategy has been enforced through which the construction industry has been given considerable tax benefits. Additionally, a cushion has been provided to the construction and other relevant industries which represent a large part of the economy. Since the construction industry provides the bread and butter for a chunk of Pakistan’s lower-income population, a long-term and indefinite lockdown may not be a viable option and may result in an increase in the poverty rate, pushing more people towards the poverty line. Through the Tax Laws (Amendment) Ordinance 2020, the government has intended to introduce amendments into the Income Tax Ordinance 2001 for immediate arrangements to cater to the lower-income segments of the economy. Through the Eleventh Schedule, Rules For Computation of Profits and Gains of Builders and Developers and Tax Payable, Rule 10, Tax Laws (Amendment) Ordinance 2020, provisions and a table have been added whereby all areas of Pakistan have been divided into three categories. In Category-I, the three big cities of Karachi, Lahore and Islamabad have been included. Category-II consists of the cities of Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad and Quetta. The remaining small and large towns of the country are included in Category-III. Maximum fixed tax slabs have been made for the cities of Category I. The fixed tax rate for Category-I commercial buildings, residential apartments as well as industrial buildings and plots has been finalized. The maximum fixed tax rate is PKR 250 per square foot and the minimum tax rate is PKR 50 per square foot for Category-III.

Through the provisions of section 100 D (b) (4), builders and developers are bound to start their construction projects from December 31, 2020. They are also supposed to complete their construction projects by September 30, 2022, which in turn will ensure an efficient and timely completion of projects.

Through the introduction of the above-mentioned provision, all builders and developers are bound to register with the Securities and Exchange Commission of Pakistan (SECP). Section 100D (1)(3) (b)(i) of the Tax Laws (Amendment) Ordinance 2020 has been reproduced below for reference:

“…(b) if the investment is made by a person in a project through a company or an association of persons —

such company or association of person shall be a single object (builder or developer) company or association of persons registered under the Companies Act, 2017 (XIX of 2017) or the Partnership Act, 1932 (IX of 1932), as the case may be, after the date of commencement of the Tax Laws (Amendment) Ordinance, 2020 and on or before the 31st day of December, 2020…”

After registration, the name of shareholders and builders cannot be changed without the approval of the SECP Board. Rule 08 of the Rules For Computation of Profits and Gains of Builders and Developers and Tax Payable has been reproduced below for reference:

“…8. Restriction on change in pattern of ownership of a builder or developer before completion of a project.

Where exemption from the provisions of section 111 has been claimed under sub-section (3) of section 100D, the following restrictions shall apply, namely: a shareholder or a partner of a builder or developer shall not be allowed a change in ownership of an incomplete project except where at least fifty percent of the total project cost, as certified by a firm of chartered accountants having an ICAP OCR rating of ‘satisfactory’, notified by the Board for this purpose, has been incurred up to the date of change of ownership; The succession to legal heirs in case of deceased shareholder or a partner shall be allowed; The additional partners or shareholders in a builder or developer after the 31st day of December, 2020 may join but additional partners or shareholders shall not be eligible for exemption provided under subsection of section 100D.”

The above-mentioned amendment was necessary to enable the Income Tax Ordinance 2001 to deal with the prospective situation of unemployment during lockdown by providing space to lower-income groups and daily wage labourers to earn their livelihoods and ensuring that the projects of the construction industry get efficiently managed and regulated.  Moreover, several withholding and service taxes have been lifted from construction services till the end of the pandemic by introducing Rule 7 in the aforementioned Rules. This has been done to provide ease and relief to people linked with this sector in order to address the potential decrease in earnings and work opportunities during the pandemic. It also shows a compassionate approach of the government towards its citizens and allows people to earn in a worry-free environment without the burden of heavy taxation.

The tax on dividends has been waived for the time under section 100D:

“(7)     Dividend income paid to a person by a builder or developer being a company out of the profits and gains derived from a project shall be exempt from tax.”

Provisions regarding the set-off of any loss and no tax credit are to be allowed against tax payable, except credit for tax collected from the builder or developer under Section 236K – collected after the date of promulgation of the Ordinance on the purchase of immovable property utilized in an eligible project. Section 100D (2) (d) reads as follows:

“…(2) Where sub-section (1) applies…

…(d) no tax credit shall be allowed against the tax payable under sub-section (1) except credit for tax under section 236K collected from the builder or developer after the • commencement of the Tax Laws (Amendment) Ordinance, 2020 on purchase of immovable property utilized in a project …”

Further amendments specify that the provisions of Section 111 of the Income Tax Ordinance 2001 shall not apply to any shareholder or partner of a builder or developer in respect of any amount invested as capital by a builder or developer or land possessed or acquired by the builder or developer, or its partner in case of a limited liability partnership or an association of persons, if the amount is invested as capital or the land is transferred on or before December 31, 2020 in the manner prescribed and is utilized in a construction or development project in a specified manner.

Exemptions from the provisions of Section 111 shall also be available to the first purchaser of newly-constructed buildings of a project if the purchase is made on or before September 30, 2022, which shows an active step by the government to encourage investment and provide a platform for the expansion and development of the construction industry in Pakistan, in the manner prescribed. However, exemption will not be available to the holder of any public office as defined in the Voluntary Declaration of Domestic Asset Act 2018 or his or her benamdar as defined in the Benami Transactions (Prohibition) Act 2017 or his or her spouse or dependents, or for any proceeds derived from the commission of a criminal offence including money laundering and terror financing but excluding the offence of tax evasion.

The government seems to have taken steps to ensure the effective flow of finance amongst the general populace, particularly catering to lower-income families by allowing them to work and helping prevent an increase in poverty. At the same time, safety measures are necessary to be observed and implemented at the workplace, including social distancing rules, so that people not only have a means of earning their livelihood but the huge number of them being affected by the pandemic can also be kept under control.


  • Income Tax Ordinance, 2001;
  • Tax Laws (Amendment) Ordinance 2020
  • Article 89 (1) of the Constitution of Islamic Republic Of Pakistan, 1973

The views expressed in this article are those of the author and do not necessarily represent the views of or any organization with which he might be associated.

Sardar Farrukh Mushtaq

Author: Sardar Farrukh Mushtaq

The writer holds an LLB degree from University of the Punjab and is an Advocate. He currently serves as an Associate at Surridge & Beecheno, Lahore and practices law in the civil, criminal, family, medical negligence, tax and corporate sectors. He can be reached at [email protected]