To get the wheels of 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 workforce and engaging many service provider from 70 other industries.
The relief package includes rationalization of Capital Gains Tax (CGT), a reduction in the rate of tax in accordance with the increase in the valuation table, and a reduction in CGT holding period for constructed property from 4 years to 3 years. Further, CGT holding period for real estate/plots may remain 8 years, but the rate of tax may be significantly reduced on a sliding scale from fourth year onwards. At the same time, to bring down the cost of construction, 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 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 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. 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. Another significant concession, the construction, purchase/sale of first house shall be exempted from all taxes, including capital gains tax. All provinces/development authorities are in the process of introducing fully automated one window portals for processing approvals and all other client services/facilitation. A major incentive is a subsidy of Rs 30 billion for projects of NAPHDA. In line with 7% interest rate offered to industries for Greenfield Projects, subsidy/lower rates (preferably 6%) 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, the Prime Minister 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 Chairman Association of Builders and Developers of Pakistan (ABAD) 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 depend 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/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 more than offset by higher turnovers of industries allied with it. Needless to say, when construction boom takes place in an economy, the 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 the 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.