PM’s Package for Construction Industry

The New Deal for Economy?

On April 03, Prime Minister Imran Khan announced a relief package for the construction industry with the twofold aim of providing employment to daily wage earners, and spurring economic activity. The package also includes additional incentives for builders and developers to build low-cost housing for the poor under the Naya Pakistan Housing Programme. The proposed package contains Direct and Indirect tax and other economic incentives for the construction and development sector. The package is a good sign for the growth of overall economy as construction and development sector supports hundreds of related industries in country.

At a time when the market is uncertain and there are global developments hampering growth, Pakistan decided to look inwards to improve the economy. In the midst of the COVID-19 outbreak, Prime Minister of Pakistan, Imran Khan, on April 3, announced what is termed by official quarters as a “comprehensive relief/stimulus package” for the construction sector. The package has been announced with a view to expand the ailing economy and to cushion the catastrophic impacts of lock down in the country. The government has also approved industry status for the construction sector after announcing establishment of a Construction Industry Development Board. The Tax Law (Amendment) Ordinance, 2020 has also been formally promulgated to give effect to the much-awaited incentive package.

The construction sector is one of the largest sectors that accounts for 2.5 percent of the total GDP of Pakistan. According to Economic Survey of Pakistan 2018-19, the sector employs 8 percent of total labour force and it is also associated indirectly with 16 percent of the total employed people as more than 40 allied industries such as electronics, steel and Iron industry, wood products, and cement industry are directly related to the construction sector. Most importantly, according to economic survey statistics, the construction industry has replaced the energy sector in attracting the highest net Foreign Direct Investment of $386.8 million in the FY 2019.

According to the Economic Survey of Pakistan 2018-19, the construction sector experienced a negative growth of 7.57 percent in the FY 19, in a sharp contrast to a growth rate of 8.2 percent in the FY 18. As a result, allied industries in the construction sector didn’t perform at optimal levels in the fiscal year. Low spending on PSDP in the last few years, the requirement of money trials from investors, assessment of income, actual valuation of real estate by FBR, requirement of CNIC, restriction on sale of construction material, restriction on non-registered clients on more than 10 million transactions were some bottlenecks that had prevented the investor from pouring their capital into the sector; consequently, it resulted in the dismal performance of construction and its allied industries.

Under the incentive scheme for the sector, which will be enforced after the promulgation of Presidential Ordinance, fixed tax regime irrespective of the profit margins will be introduced for the developers and builders. The sector would not be asked for the provision of the source of money in case of purchasing or construction of residential or commercial buildings. The waiver of 90 percent tax will be granted to those investors who will invest their capital in the construction projects under the Naya Pakistan Housing Program (NPHP).

Mortgage financing will be provided for the low-cost construction of houses on very low interest rate of 6 percent. The high rise construction policy has also been approved under the scheme. Withholding tax on all building material, except steel and cement, would not be charged. Developers and builders would get a tax credit with 10 multiples of the tax already paid under the scheme. Capital Gain Tax holding periods for constructing property have been fixed 3 years instead of 4 years.

Fresh valuation of real estate, Substantial reduction in sales tax and federal excise duties on construction material, exempt of all taxes including CGT on first purchase or sale of a house for a family are also part of an incentive program. Subsidy of Rs30 billion would be granted under NPHP. The Construction sector has been granted a full status of Construction industry; and for the promotion of the sector, Construction Industry Development Board would be constituted.

There would be multitudes of short-term and long-term benefits of the incentive scheme for the construction sector; on one hand, it will help to mediate the shocks of lockdown by providing employment to skilled, semi-skilled, non-skilled, daily wagers, and labourers in the current situation, while on the other hand, it will not only help in overcoming the housing units in Pakistan, but also will stimulate the economic boom in the long term. It will help to overcome economic stagnation — that was prevalent in the last few years — by circulation of cash in the market and pouring domestic as well as FDI in the country.

Pakistan is the country of 207 million people with a very high population growth of 2.1 percent. It is expected to reach 403 million by 2050, according to a UN report. The country is facing a severe shortage of housing units. According to the World Bank Report, there is a total backlog of 10 million housing units and a demand of building 400,000 housing units annually. According to a recent study by the Urban Unit in Punjab, there lie 68 percent vacant plots in recognised housing schemes.

With the exemption of withholding tax on building material, reduction of sales tax and excise duties on construction material and a waiver of 90 percent tax on the condition of investment in NPHP will prompt investors to construct low cost houses on vacant plots. These initiatives will help to overcome the shortage of housing units in Pakistan.

Creation of jobs and pouring of domestic and foreign investment into the sector will provide, on the one hand, employment to the labourers and daily wage workers during the pandemic, while on the other hand, will spur economic growth in the country. Investment in the construction sector will build new housing units, high buildings, and commercial centres; consequently, it will reduce rents and improve quality of life. Improved infrastructure will give a boost to businesses, thereby creating more jobs. Enhanced business activity and expansion of the economy will raise per capita income of people, which will help in the reduction of poverty in the country.

There are some challenges too which entail the formulation of well-articulated standard of procedures and mechanism in order to protect the interest of end-users under the scheme. The incentive scheme can lead the surging rates of properties and make it impossible for the middle and lower middle class to acquire property.

 

Similarly, some developers and builders might build homes under NPHP to distant places without taking into account the factors of targeting, long-term affordability, occupancy, maintenance, community development and social infrastructure. Poor choice of location and designs, a focus on quantity over quality and looming risk of corruption in the projects are some serious and major concerns which demand urgent attention in order to strike a balance between the interest of end-users and the construction sector.

Overview of the Package

The main incentives, stimuli, reliefs at federal and provincial levels in addition to exempting construction sector from lockout from April 14, 2020 and establishment of Construction Industry Development Board to promote the sector, as reported in Press are:

Status of industry to construction sector

Prime Minister has already approved the status of industry for construction sector. However, implementation of this decision was recommended to be deferred till next budget by Ministry of Commerce and Federal Board of Revenue (FBR). However, this decision is now implemented forthwith.

Rationalization of Capital Gains Tax (CGT)

1. Rate of tax be reduced in accordance with/proportionate to the increase in the valuation table.
2. CGT holding period for constructed property be reduced from 4 years to 3 years (as was the case prior to 2019).
3. CGT holding period for real estate/plots may remain 8 years, however, the rate of tax may be significantly reduced on sliding scale from fourth year onwards.

Valuation of real state/plots

FBR has already initiated the process of fresh valuation of urban real estate in consultation with the real estate organizations of respective cities. The process will be expedited as a part of package announced by the Prime Minister.

Rationalization/reduction in sales tax on construction material

To bring down the cost of construction, sales tax and excise duties levied on construction material are to be reduced suitably.

Tax incentives

Source of investment till 31 December 2020 will not be probed under section 111 of the Income Tax Ordinance, 2001.

Withholding of tax by constructors on all construction related material has been waived off, except on cement and iron.

Tax on builders and developers will be levied at fixed rates of Rs 50 per square foot for builders and Rs 100 per square yard for developers. Those carrying out projects under the Naya Pakistan Housing Scheme Authority (NAPHDA) for the poor will only have to pay 10% of the fixed tax.

Sales tax on construction services shall be exempted by all provinces, provided the builders and developers are chargeable to sales tax at fixed rates mentioned above, at the time of sale of property.

Low cost housing schemes by NAPHDA provincial housing authorities will be completely exempted from provincial sales taxes by all provinces. All provincial/municipal taxes/duties/fees/levies/charges on transfer/registration of urban properties are to be clubbed under one head and charged at the rate of 2% of valuation.

E-stamping system is being introduced by all provinces in line with the system already introduced by Punjab and it will be expedited.

Exemption of taxes on first house

Construction, purchase/sale of first house should be exempted from all taxes, including capital gains tax.

 Establishment of special circles

FBR to expedite establishment of already approved automated special circles for construction industry to ensure easy and transparent tax collection.

Measures for creating ease of doing business

The process of fresh master planning/updating of existing master plans and zoning already initiated by provinces may be expedited.

Reduction in project approval time (preferably to 45 days), by all provincial governments/respective development authorities by issuing No-objection Certificates (NOCs), automation and concurrent processing of approvals, strictly in accordance with laid down timelines. Wherever possible NOC regime be replaced with compliance of bylaws regime (after introducing fresh zoning bylaws).

All provinces/development authorities are in the process of introducing fully automated one window portals for processing approvals and all other client services/facilitation and it will be expedited.

Policy on high rise construction has already been approved by the Prime Minister. Notification to this effect has been issued for Islamabad Capital Territory (CT), however, the same has yet not been issued for other major cities/urban areas that must be done on priority basis.

Housing/mortgage financing

Subsidy of Rs 30 billion is announced for projects of NAPHDA. In line with 7% interest rate offered to industries for Greenfield Projects, subsidy/lower rates (preferably 6%) be afforded for housing mortgage of one hundred thousand low cost housing units, construction of which is planned to be initiated in the current year.

Legal issues – civil procedures ordinance/special benches

Ministry of Law and Justice is working on a Civil Procedures Ordinance for ICT, which after approval will be shared with provincial governments, for implementation in all provinces. The Law Ministry is also working on constitution of special benches for hearing civil disputes/cases concerning real estate/construction sector.

A cursory look at the package

The main incentives announced by the Prime Minister include:

1. Those who will invest in the industry this year will not be questioned about their source of income.
2. Fixed tax will be introduced in the construction sector and if the investor invests in construction projects under Naya Pakistan Housing Authority, 90% fixed tax will be removed and he will only pay 10% tax.
3. Withholding tax on construction will be lifted from all sectors, except steel and cement.
4. There will be no capital gain tax for a family that sells its house.
5. The tax rate will be fixed for the construction sector, and constructors will be charged tax per square foot or square yard.
6. A subsidy of Rs. 30 billion is being given to Naya Pakistan Housing project to spur the construction activities.
7. Sales tax are being reduced in coordination with the provinces, Punjab and Khyber-Pakhtunkhwa have agreed to reduce it to two percent
8. Construction Industry Development Board to be set up to support the sector.
9. Rate of tax be reduced in accordance with / proportionate to the increase in the valuation table
10. CGT holding period for constructed property be reduced from 4 years to 3 years (as was the case prior to 2019).
11. CGT holding period for real estate / plots may remain 8 years, however the rate of tax may be significantly reduced on sliding scale from fourth year onwards.
12. While declaring their net wealth, builders and developers will be eligible to take credit / impute income equal to 10 times of tax paid under this schedule