General Construction Contractor

Construction sector in Pakistan and tax authorities

Overview of the construction sector in Pakistan

Construction is one of the most dynamic sectors of the Pakistan economy, with real growth of 14% during the last period. Construction activity is concentrated in the main urban centers. State participation in the construction sector is mainly concentrated in infrastructure and works of art. Public financing of technical constructions represents 85% of the total construction works financed by the State.

Construction in the private sector is mainly concentrated in housing and buildings for families, accounting for around 82% of total private construction financing. The more people there are in the economy, the greater the demand for housing. it is the households that need housing services: usually one household per household. The magnitude and demographic structure of families are variable and not entirely exogenic.

Land and buildings  – Dsspak

The person who wants to have a building constructed is the person who “erects” the building. The lease of land or lot is an exempt supply, except in cases where the land is used to park transport vehicles and other means of transportation. The parking of means of transport and other mobile vehicles is subject to VAT. The provision of services in the construction sector, and therefore the process of constructing and maintaining buildings, are taxable services. Rental of buildings, unless owned by government, central or local authorities, is subject to tax. The rental of public buildings by central or local authorities will be considered an exempt delivery for VAT purposes. The definition of “land”, according to this law, implies an undeveloped, neglected, undeveloped area that contains no construction, except for simple partitions or fences which the limits of this zone. The building involves a fixed structure on the land, or part of that construction (such as a room or apartment), which includes both the land on which it sits and the environment included in the sale, but does not include not caravans or trailers.

Specialties VAT treatment

Based on the Pakistan VAT law, the minimum tax on buildings intended for residential construction in the construction process is based on the minimum tax price and the building area.

The minimum interest prices imposed in the process of construction of residential buildings are determined by decision of the Council of Ministers, after consultation with the Pakistan Association of Builders.

Each month, the builder submits a “work in progress” report, which must be verified by the auditor. A GTD technical engineer estimates the amount of work performed during the month, then the auditor adjusts the estimate with the movement of the inventory of goods. In addition, all other costs, i.e. cost of land, wages and social security payments, electricity, etc. are taken into account. Once the engineer has completed his work, the auditor checks the movement of inventory to ensure that the numbers match the estimated amount of work completed.

Income tax and personal income tax

For construction and repair projects spanning a calendar year, the final determination of profit and loss occurs annually and not the year in which the project ends. The income calculated during the year in which the temporary acceptance takes place is taxed in accordance with the legislation of the same year.

The sale of real estate, land and buildings is taxable of realized capital gains. Such a condition does not apply in cases where the ownership of the land is exchanged for the ownership of the building constructed on that land.

Tax deduction (tax on current projects)

In accordance with the Income Tax Laws, both advances for works and amounts of advance invoices paid to those performing the works, i.e. contractors or sub-contractors, are subject to the withholding tax.

Dividend tax

In the case of construction projects, the final determination of profit and loss takes place annually; the benefits of the project will be distributed later.

In accordance with applicable regulations in Pakistan, the withholding rate on dividends is 10 percent if the dividend is paid to non-residents and resident individuals. Payments of dividends to resident companies are exempt from withholding tax. However, bilateral tax treaties should also be taken into account, which can lead to lower tax rates.

Tax treatment of construction and repair works outside Pakistan

Profits from construction and repair works and technical services provided outside Pakistan, added to income generated in Pakistan, are exempt from corporation tax, whether or not these profits are transferred to Pakistan.

On the other hand, if these types of profits are distributed to shareholders, they are taxed as dividends.

Special tax audits in the event of mergers, mergers or demergers of construction companies

The merger includes more than all of the company’s assets and liabilities with the acquiring control company. The rights and obligations of the merging company are to identify what it does. The control decisions of a merging company are indicated in the name and registration number of the acquiring company. The power to represent the amalgamated company has already been transferred to the controlling company by the amalgamation. The decision to control a company transferred by the merger only concerns the moment of the merger. If the audit covers the time following the merger, it is necessary to: request a new audit order for the company that took over the company from the previous company. If the merger takes place while the audit is in progress, the parties will change automatically, that is, all communication will take place with the company taking over.

The amalgamated company is subject to tax until the amalgamation is completed. The company which acquires control is deemed to have carried out the activities of the company resulting from the merger since the beginning of the last financial year of the company resulting from the merger; If the audit focuses on the evaluation of the transaction before or after the day of the merger, it is necessary to establish audit notes, one for each company. The merger allows one or more companies to transfer their assets to an existing company or to a company new company created by them, or a temporary “company”. By splitting up, a company can also transfer its assets to certain existing companies or to new companies.

These opportunities are open to companies in the liquidation process, provided that the distribution of their assets between the partners is not subject to execution. The partners of companies which transfer their assets within the framework of the aforementioned transactions benefit from the initial capital shares or from the shares of the beneficiary company (ies). Sometimes they may qualify for a cash commission, the value of which must not exceed 10% of the face value of the shares or the starting capital.

If the operation involves the creation of new companies, each of them should be created in accordance with the rules applicable to the form of the company being incorporated. The merger or the split leads to the disintegration without liquidation of the dismembered companies and their assets are fully transferred to the beneficiary companies, in the state they are at the time of the completion of the operation.

However, no action is taken to exchange the shares of the initial capital or the shares of the beneficiary company (ies) for the initial capital shares or the shares of the merged or spin-off company (s) if these shares belong to:

• The company or the beneficiary person acting on behalf of or on behalf of this company.
• The merged or disaggregated company or a person acting in the name or on behalf of this company.

Entry into force of the merger or demerger:

• In the event of the constitution of one or more new companies: on the date of registration of the last of the newly created companies in the trade register.
• In all other cases: on the date of the last meeting of the meeting approving the operation, except in cases where the contract provides for the operation to enter into force on a date other than the closing date of the operation of the beneficiary company or companies and not before the closing date of the closed financial year of the company or companies which transfer their assets.

Partners in a business may agree to redistribute the business rather than liquidate it. It is common for there to be a real divide. There is real division when the partners of a business take over part of the business and run them as independent businesses.

Dsspak the leading construction contractor in Pakistan is well aware of all the laws and regulations related to construction and its implications. Once you avail our services you will remain free from all the worries because our team of professionals can handle it from start till end.