Ease of Doing Housing Business: What is Required Going Forward

The government is contemplating giving construction an industry status. That effectively means that, once declared, like other industries, construction will be entitled for tax exemptions, relaxations and other forms of subsidies or waivers. In the same vein, real estate developers are also hoping to rally support for housing from the government and kick start development in an otherwise slowed down economy.

The developers prefer a fixed rate tax regime, one similar to that faced by a few other industries where the turnover tax is deemed as full and final. The rates recommended by the Association of Builder and Developers (ABAD) are Rs. 40 per square feet (sqft) for units with a covered area of less than 750 sqft, Rs. 80 per sqft for a covered area between 750-1,500 sqft, and Rs. 140 per sqft for covered areas above 1,500 sqft.

Assuming the selling price of an apartment to be Rs. 6,500 per sqft, the revenue tax is computed at 0.6 percent for apartments with covered area under 750 sqft, 1.2 percent for 750-1500 sqft, and 2.2 percent for above 1500 sqft. For a higher selling price, the turn over tax would be lower. Such turn over taxes are applicable to industries where margins are low such as Oil and Marketing companies. But is construction a low margin sector?

Concerned with the documentation issues, developers are asking for a no-questions-asked policy for first time buyers. There used to be such a provision a couple of decades back, which the developers believe could be reintroduced. Buyers in Pakistan usually do not have enough declared money to make a full payment on property. Even the salaried class mostly use proceeds from selling inheritances such as family land or house to purchase real estate assets. The family real estate is sold at declared value which is a fraction of the actual value. This is because the buyer can only declare a fraction of his inheritance while the rest of the amount is not documented on fresh purchase.

Developers argue that if they have to pay actual income tax on units to be sold, they cannot declare the full amount as the buyer usually does not have the required fully declared amount to buy. These are inevitable shades of grey. In the case of expatriates buying property, this situation is reversed. The Pakistanis residing outside want to fully declare the amount and to transfer directly into the seller’s account, but the seller (or the developer in this case) is reluctant to do so. This results in different selling prices of two identical units, one sold to local (buying on inherited money) and the other to an expat.

The other taxation agenda on the plate is to do away with input taxes on construction material such as Goods and Services Tax of 17 percent on cement and steel. This can surely help in making housing units more affordable. Such incentives are imperative for the success of low-cost housing schemes under the Naya Pakistan Housing & Development Authority (NPH&DA). It is better to have input taxes adjustment based on the covered area – lower the area, higher should be the input tax exemptions and vice versa.   

In addition, the developers are asking for opening up land holding of governments for open auction, since majority of land is owned by provincial governments. The structure of opening up is under discussion in government at the federal level. However, the problem lies in the role of respective provincial government. Without having a coordination body or secretariat, it is going to be very hard to formulate auction plans.     

Another issue is that there are inevitable delays in developing projects from the point of conception to handing over units to buyers. There are around 18 approvals required for a high-rise project.  It takes around 18-30 months to obtain such approvals. This dilutes the commercial viability of the projects. Therefore, developers are seeking for a one window operation under NPH&DA. The fear is that it might end up becoming another window in addition to the 18 existing ones while failing to bring provinces and other state agencies on board.

Last but not the least, developers require clarity on foreclosure laws which is imperative for the development of mortgage market. Without a vibrant mortgage market, housing demand will remain at bay from its true growing potential. However, at prevailing high interest rates, even in areas where land titles are clear and foreclosure is a possibility, the demand is suppressed.

Thus, until interest rates come down significantly, accelerating housing demand is a big challenge. The developer will build projects only in areas where considerable demand exists and where chances of payment in cash or through installments spanning over the construction period are high. But anticipating this opportunity means waiting for another 2 years for interest rates to come down in single digits. The government has that much time to form a structure to boost housing by then.