To get the wheels of the industry moving, the government has announced a comprehensive relief package for the construction sector which has now been given the status of an industry. The construction sector contributes significantly to the GDP by employing a large number of skilled and unskilled workers and engaging many service providers from 70 other industries.
The relief package includes rationalization of the Capital Gains Tax (CGT), a reduction in the rate of tax in accordance with the increase in the valuation table, and a reduction in the CGT holding period for constructed property from 4 years to 3 years. Further, the CGT holding period for real estate/plots may remain eight years, but the rate of tax may be significantly reduced on a sliding scale from the fourth year onwards. At the same time, to bring down the cost of construction, the sales tax and excise duties levied on construction material are to be reduced suitably.
To encourage investment, the source of financing for construction activities till December 31, 2020, will not be probed under the Section 111 of the Income Tax Ordinance, 2001. Withholding of tax by constructors on all construction-related material has also been waived, except on cement and iron. Tax 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. The sales tax on construction services shall be exempted by all provinces, provided the builders and developers are chargeable to the sales tax at fixed rates at the time of the 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 and registration of urban properties are to be clubbed under one head and charged at the rate of 2pc of valuation.
Another significant concession, the construction, purchase and sale of the first house shall be exempted from all taxes, including the capital gains tax. All provinces and development authorities are in the process of introducing fully automated window portals for processing approvals and all other client services and facilitation. A major incentive is a subsidy of Rs 30 billion for projects of NAPHDA. In line with a 7pc interest rate offered to industries for greenfield projects, subsidy/lower rates (preferably 6pc) will 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.
While announcing the concession package, Prime Minister Imran Khan put special emphasis on boosting the construction sector “with a view to keeping the wheels of economy moving, mitigating the impact of the lockdown on people and facilitating the daily wagers”. He said that the government was also working out a strategy for those who cannot afford to pay house rent. Clearly, the PTI government’s concern is to create a balance between maintaining a lockdown and keeping the construction sector running to save people from hunger.
The Association of Builders and Developers of Pakistan (ABAD) chairman has termed the tax incentives announced by the government “a historic package for the construction industry of Pakistan” which will prove a turning point for the economy. In a statement, he said that ABAD had been demanding incentives for the construction sector because more than 70 allied industries depended on the construction sector. There is a consensus of opinion among experts that in order to combat recession and reduce the economic toll of the lockdown, a comprehensive relief plan for real estate, housing and construction sectors was the need of the hour.
However, an important point missing from the construction industry package is a 10-year tax holiday to enable all stakeholders to make investment and prepare long-term plans. But those in the government, who devised the package, failed to realise that long-term tax relaxation for the real estate, housing and construction sectors will help around 70 industries – a step which will not only avoid recession and revive the economy but also provide employment to millions of people in the country. It needs to be understood that the loss of revenue from tax concessions to the housing and construction sector will be largely offset by higher turnovers of industries allied with it.
Needless to say, when a construction boom takes place in an economy, demand for numerous industries supplying goods and services also increases, giving a strong impetus to employment generation and the service sector. At the same time, while giving the construction sector the status of an industry it is important to ensure that all employees and workers should be allowed the benefits permissible under relevant labour laws such as Social Security, Employees Old Age Benefits, Workers’ Welfare Fund, etc. This will make for stable growth of the construction industry on a long-term basis.