NationalVOLUME 15 ISSUE # 17

Construction incentives

The government has announced a package of incentives for the construction sector to restart economic activities which have come to a halt in efforts to contain the coronavirus pandemic. However, the incentives are expected to largely remain unutilised and unfruitful as a lockdown continues in the country.

It appears the construction package faces the fate of a move taken a few months ago, under which taxes on main exports had been slashed in hope to give the economy a boost and narrow the trade deficit. At a time when the country is facing an increasing threat of the deadly coronavirus, Prime Minister Imran Khan announced a set of incentives for people investing in the construction sector and promised to open allied industries to strike a balance between economic activities and efforts to contain the pandemic.

Giving the status of an “industry” to the construction sector, Prime Minster Imran Khan unveiled the relief package, under which those investing this year would not be asked about their sources of income. A fixed tax would be levied on construction activities under the package while 90pc taxes would be waived on the construction of houses under the Naya Pakistan Housing Programme. Also, the capital gain tax on the sale and purchase of property has been withdrawn. All construction material, except steel and cement, would be exempted from the withholding tax.

The incentives for the construction industry and allied industries have been announced after consultation with all provinces and governments of Azad Kashmir and Gilgit-Baltistan and all decided to curtail taxes on the industry. The Punjab and Khyber Pakhtunkhwa have already consolidated their taxes on the industry to 2pc only. The government will set up a Construction Industry Development Board for the promotion of the construction industry and a subsidy of Rs30 billion would be given to those who get their houses built under the Naya Pakistan Housing Programme.

On paper, the package is a welcome step to boost the economy at a time when the adverse impact of the pandemic is affecting all sectors of society. Construction, a term that encompasses activities related to the creation of physical infrastructure and related activities, plays a crucial role in the economy of any country. Studies have suggested that more than 60 other associated industries form linkages with the construction and housing industry. It makes the sector pivotal to economic development as it is crucial to providing shelter, employment and infrastructure.

However, critics say it is a second tax amnesty scheme of the government for the sector in less than a year, which will allow people to invest their black money in the construction sector without disclosing their sources of income. The immunity from declaring the source of income will be available only to builders and developers of housing societies and projects and it has not been extended to building own homes.

However, tax on gains on investment has been waived for all citizens who sell their houses. Currently, the government charges 5pc to 20pc capital gains tax on the sale of houses and open plots. Analysts say it may have implications in the longer run for the country due to its commitments to the Financial Action Task Force (FATF) and the International Monetary Fund (IMF). They say Prime Minister Imran Khan was a staunch opponent of tax amnesty schemes before coming to power, but he has announced two schemes in less than a year now.

Analysts say the new scheme will allow people invest their black money in the construction sector, depriving the country of much-needed taxes. It will also discriminate against people who pay their taxes regularly and salaried persons who are bound to pay up to 35pc of their gross income as tax. The exemption to the construction sector from regular income tax regime and charging fixed rates are also against the norms of taxing people on the basis their real income.

Experts blame the government has exploited the coronavirus opportunity to accommodate influential people who were pressurizing it to provide tax amnesty to the sector. It is said the move has been made in a situation, when the IMF would not object to it, keeping in view the ongoing adverse implications of Covid-19 on Pakistan’s economy and low-income groups.

The government aims to spur activity across a wide spectrum of sectors, attract investment, generate jobs and provide economic sustenance to those who need it most. However, the government will have to end the lockdown to achieve its aims. The whole world is in a lockdown. It is tightening restrictions to contain the spread of the virus. The situation in Pakistan is not good either. If the lockdown is not lifted but all industries related to the construction industry are allowed to work, it will lift restrictions on a large number of people and the pandemic situation could worsen.

Despite some genuine reservations, the intention behind the package is not bad because of the urgency to create employment for the lowest income groups and kick-start the economy once again in the time of Covid-19, when the whole world is shut and all other sectors in the country have come to a halt. However, the government must take solid steps to contain the spread of the virus while allowing the construction industry and allied industries to reopen.