Key Takeaways
- The Federal Board of Revenue (FBR) has issued a tax demand of Rs. 1.82 billion against Faisal Town (Private) Limited.
- The dispute centers on the company's use of the Percentage of Completion method for recognizing income from its projects.
- FBR amended the company’s tax assessment, citing an erroneous and significant understatement of taxable income.
The Federal Board of Revenue (FBR) has issued a substantial Rs. 1.82 billion tax demand against Faisal Town (Private) Limited, alleging that the real estate developer misreported its income for Tax Year 2020 through an incorrect method of revenue recognition.
According to an assessment order from the Large Taxpayers Office (LTO) Islamabad, FBR amended the company’s tax assessment after concluding that it was erroneous and resulted in a significant understatement of taxable income. This demand is separate from any other audit-related additions that may be examined later.
The dispute revolves around the Percentage of Completion (POC) method used for recognizing income from long-term development projects. Initially, Faisal Town estimated its total project development cost at Rs. 40.46 billion for a project spanning 9,189 kanals. However, during the assessment, the company revised this estimate to Rs. 90.46 billion, citing an expansion of the project area to 25,944 kanals.
According to FBR, the revised estimate reduced the project’s completion ratio from 44.73 percent to 19.95 percent, significantly lowering the revenue and taxable income recognized for the year. The tax authority rejected these revised figures, stating that the company failed to provide sufficient evidence, including feasibility studies, board approvals, or contemporaneous cost estimates, to justify the change.
Furthermore, FBR noted that the revised approval issued by the Rawalpindi Development Authority (RDA) was granted in January 2021, after the close of Tax Year 2020, and therefore could not be applied retrospectively. The tax authority also questioned the revised estimates because the projected development cost nearly doubled while the company’s declared total project revenue remained unchanged at Rs. 45.91 billion, creating what it described as a commercially inconsistent position.
Using the original estimated development cost of Rs. 40.46 billion, FBR recalculated the project’s completion ratio at 44.73% and determined Faisal Town’s taxable income for Tax Year 2020 at Rs. 6.14 billion. Based on the applicable corporate tax rate of 29%, FBR computed a tax liability of approximately Rs. 1.82 billion, concluding that the taxpayer failed to substantiate its revised revenue recognition method.
ProPakistani reached out to the property developer for their response but did not receive any statement at the time of publication.
