To revive the economy, the government announced a Rs 100 billion relief package for the construction industry in April 2020. The construction industry is a major employer and feeds over 42 ancillary sectors, including aluminum, brick, cables, cement, fixtures, glass, kitchen and bathroom fittings, marble, paint, steel, tiles, transportation, warehousing and wood. It has a far-reaching impact on the overall economy as it employs eight percent of the total labour force.
The housing package includes a wide range of incentives. Investors, developers and builders will not be questioned about their sources of income. Taxes will be computed according to the size of the property (per square foot or per square yard) instead of the price of the property (the case previously) and as a result will be substantially lower. Further, builders and developers will not be required to withhold tax when purchasing building materials (except steel and cement) and on certain services (such as plumbing).
The construction package also offers many concessions – tax breaks, waivers and subsidies for builders, developers and property owners. Builders and developers have to register their projects on the Federal Board of Revenue’s (FBR) dedicated portal, Iris, by December 31, 2020, and complete “grey structures” (basic structures without interior finishings) by September 30, 2022. In addition, a Construction Industry Development Board (CIDB) will be set up to facilitate the private construction industry and encourage investment.
Another major concession is that if builders and developers take on a project related to low-cost housing under the Naya Pakistan Housing Program, taxes will be reduced by 90%. Sales tax and excise duties levied on construction materials will be reduced. Owners of five- and 10-marla residential plots will receive subsidised house building loans. People constructing, buying or selling their first houses are exempted from several taxes and fees, including advance tax, capital gains tax, stamp duty tax and registration fees.
The housing package has two objectives. One is to bridge the housing gap through the Naya Pakistan Housing Program (NPHP) which was initiated in April 2019, with the goal of building five million houses in five years. The second is to revive the economy by creating new employment opportunities. To ensure that the goals are met, the government set up the National Committee on Housing Construction and Development (NCHCD) in July, whose basic task is to monitor the construction sector and ensure that any hurdles that arise are overcome quickly.
One of the most effective incentives is that people are not required to declare their sources of income before investing in construction-related projects. The “no questions asked” policy will encourage builders to invest their undocumented wealth in property and construction. This initiative, apart from providing legal cover for such individuals, will encourage people to invest in property. It will also encourage the expat community, who will be spared the cumbersome paperwork required to buy or build a home.
In the opinion of experts, the fact that there will be a 90% tax reduction for builders who invest in NPHP would also boost the economy. If 500,000 units are built, they will require labour, building materials so all related sectors would benefit. Builders are of the view that if taxes are computed based on the property’s covered area (instead of the value), it will be a major incentive for mid- and low-tier builders and developers as it would result in substantial savings.
But despite all the incentives, problems remain. Experience shows that obtaining certifications and approvals from local authorities is a difficult task. Furthermore, the short time given for registering projects (December 31, 2020) and for completing grey structures as well as procuring the services of reliable contractors and workers and securing financing will prove to be big hurdles to meeting the mandated deadlines.
The major issue is securing home financing. Though there is talk of lower interest rates, yet concrete steps need to be taken in this direction. It has been proposed that the government should establish a dedicated financial institution o provide financing to the industry through lending techniques that are different from those of regular commercial banks.
As far as financing is concerned, the main incentive is aimed at people, who own five and 10-marla plots and can now take advantage of reduced and/or competitive interest rates to build houses on the plots. To this end, several banks are promoting home financing options, such as the “Mera Pakistan Mera Ghar” initiative. The government has rightly encouraged banks to allocate five percent of their portfolio to the construction segment.
According to media reports, 40 projects have been registered and 4,812 are drafted for registration. It is expected that projects worth Rs 400 billion will be registered by the end of 2020. Furthermore, the ABAD has pledged to invest Rs 1,370 billion in various construction projects, including residential ones, specifically for the NPHP, in addition to 30 to 40 high-rise buildings in Karachi and at least 1,000 more projects across the country. In this connection, the good news is that the consumption of cement is on the rise. The demand for cement increased by five percent, amounting to 3.5 million tons, in August.