In a significant development for Pakistan’s real estate and construction sector, the Federal Board of Revenue has issued an important clarification regarding the applicability of withholding tax under Section 236C of the Income Tax Ordinance, 2001 to builders and developers falling under the special tax regime prescribed under Section 7F.
The clarification addresses a long-standing practical issue faced by builders and developers who were being subjected to advance tax collection under Section 236C despite already being taxed under a separate presumptive-style framework under Section 7F.
This circular is particularly important because it recognizes the unnecessary financial burden created where tax collected under Section 236C could not effectively be adjusted against any other tax liability.
Understanding Section 236C
Section 236C deals with the collection of advance tax on the sale or transfer of immovable property.
Ordinarily, tax collected under this provision may either:
- be adjustable against the taxpayer’s final tax liability; or
- form part of advance tax adjustments in the annual return process.
The provision broadly operates as a tax collection mechanism at the time of transfer of property.
Read more about section 236 :
Tax on Property Transactions in Pakistan – Sections 236C & 236K
What is Section 7F?
Section 7F introduced a special taxation regime for certain builders and developers.
Under this mechanism:
- taxable income is determined through a prescribed formula;
- tax liability is calculated as a fixed percentage of gross receipts; and
- income is treated under the head “Income from Business”.
This regime differs from ordinary capital gain taxation principles applicable to general property transactions.
Read about section 7F:
Section 7F – Tax on Builders and Developers in Pakistan
The Practical Problem Faced by Builders & Developers
The issue emerged where builders and developers operating under Section 7F were also subjected to advance tax collection under Section 236C during sale transactions involving immovable property.
This created a serious practical problem.
Since their tax liability was already being discharged under the special framework of Section 7F, many taxpayers had limited or no additional taxable income against which the tax collected under Section 236C could be adjusted.
As a result:
- significant amounts remained unnecessarily blocked;
- liquidity pressure increased;
- working capital suffered; and
- refund complications became common.
FBR’s Clarification — What Has Been Confirmed?
Through Circular No. 07 of 2025-26 dated 31 March 2026, FBR has clarified that:
- persons taxed under Section 7F;
- who have already discharged their tax liability under that regime; and
- who do not have any other taxable income against which Section 236C tax may be adjusted,
may seek exemption from collection of advance tax under Section 236C.
This clarification substantially reduces uncertainty for qualifying builders and developers.
Role of Section 159
FBR has further clarified that eligible taxpayers may apply before the concerned Commissioner Inland Revenue under Section 159 for issuance of an exemption certificate authorizing non-collection of tax under Section 236C.
The Commissioner is required to examine each case individually and determine whether the applicant fulfills the legal requirements for exemption.
This means exemption is not automatic and must be formally obtained through the prescribed legal process.
Legal Significance of the Clarification
The clarification reflects an important taxation principle.
Where a taxpayer has already discharged liability under a special taxation regime, collection of additional adjustable taxes without practical adjustment mechanisms may create unintended hardship and administrative inefficiency.
The circular effectively recognizes that tax collection provisions should not operate in a manner that creates unjustified financial burden where no effective additional tax liability exists.
Practical Example 1
Suppose a registered developer falls entirely within the Section 7F regime and pays tax based on gross receipts as prescribed under law.
During transfer of immovable property units, advance tax under Section 236C is also collected.
If the developer has no additional taxable income available for adjustment, the amount collected under Section 236C may remain unnecessarily tied up.
Under the new clarification, such developer may apply for exemption under Section 159 to avoid future collection.
Practical Example 2
Consider a builder exclusively engaged in projects taxed under Section 7F.
If multiple property transfers occur during the tax year, repeated collection under Section 236C may create substantial cash flow pressure despite full compliance under the special tax regime.
Obtaining an exemption certificate may significantly reduce unnecessary liquidity blockage.
Important Compliance Considerations
Taxpayers seeking relief should carefully ensure that:
- tax liability under Section 7F has been properly discharged;
- no other taxable income exists against which adjustment may ordinarily be available;
- application under Section 159 is properly documented; and
- supporting records are maintained for verification purposes.
Since the Commissioner may examine applications on a case-to-case basis, documentary compliance remains critical.
The clarification issued by FBR is a positive and pragmatic step for Pakistan’s construction and development sector.
By acknowledging the practical difficulties arising from simultaneous application of Section 236C and Section 7F, the circular provides a lawful mechanism through which eligible builders and developers may seek exemption from unnecessary advance tax collection.
The development is expected to reduce liquidity pressure, minimize refund disputes, and improve operational efficiency for taxpayers operating under the special tax regime.
At a broader level, the clarification also demonstrates the importance of aligning tax administration with commercial realities and legislative intent.
Download Circular No. 07 of 2025-26 IR-Policy
