The Federal Board of Revenue (FBR) has raised a tax demand of Rs. 1.82 billion against Faisal Town (Private) Limited, accusing the real estate developer of understating taxable income for Tax Year 2020 due to an incorrect revenue recognition approach.
According to an assessment order issued by the Large Taxpayers Office (LTO) Islamabad, FBR revised the company’s tax assessment after determining that the original declaration was incorrect and resulted in a substantial reduction in taxable income.
The tax demand relates specifically to the disputed assessment, while any additional adjustments arising from separate audit proceedings may be considered separately.
The controversy centers around the Percentage of Completion (POC) method, which companies use to recognize revenue from long-term development projects based on project completion levels.
FBR stated that Faisal Town had initially estimated the total development cost of its project at Rs. 40.46 billion for an area covering 9,189 kanals. However, during the assessment proceedings, the company revised the estimated cost to Rs. 90.46 billion, citing an expansion of the project area to 25,944 kanals.
According to FBR, the revised cost estimate reduced the project completion ratio from 44.73% to 19.95%, which lowered the revenue recognized and consequently reduced the taxable income reported for the year.
The tax authority rejected the revised figures, stating that the company did not provide adequate supporting documentation, including feasibility studies, board approvals, or cost estimates prepared at the relevant time, to justify the adjustment.
FBR also noted that the revised approval from the Rawalpindi Development Authority (RDA) was issued in January 2021, after the end of Tax Year 2020, and therefore could not be used to revise calculations retrospectively.
The authority further questioned the revised cost estimates, pointing out that the projected development cost had more than doubled while the company’s declared total project revenue remained unchanged at Rs. 45.91 billion.
Using the original development cost estimate of Rs. 40.46 billion, FBR recalculated the project completion ratio at 44.73% and determined Faisal Town’s taxable income for Tax Year 2020 at Rs. 6.14 billion.
Applying the corporate tax rate of 29%, FBR calculated a tax liability of approximately Rs. 1.82 billion, concluding that the company failed to substantiate its revised revenue recognition method.
