Will the Prime Minister’s Construction-sector Package Work?

Even before the coronavirus issues, the government had been gearing to introduce a construction-sector package to incentivise the sector since it had promised to build 5 million homes during its tenure. At the same time, the natural focus on selling and buying plots meant that the construction industry did not attract the same levels of investment as the plots. This had to be changed, some people argued. For real estate activity and investment to fully contribute to the economy, the construction industry needed to be empowered. Hence the government’s plans to introduce the incentive package.

Read: Construction sector gets ‘historic’ relief package; CGT, source of income conditions revoked

More recently, the coronavirus situation and its impact on the economy, and, even more adversely, its impact on the lives of the vulnerable sections of society, has also likely pushed the government to take action. Thus, in his address to the nation on Friday (April 3), Prime Minister (PM) Imran Khan announced several measures to incentivise the construction sector.  

Prime Minister’s Construction Incentive Package

One of the first things that the PM revealed was that the construction industry will be opened from April 14. This was a critical move, especially in light of the various issues plaguing daily wagers during the ongoing viral pandemic. These individuals have been affected the most by the government-imposed lockdown and needed some relief.

Some of the additional measures for this construction-sector package include:

• No question on sources of investment in construction sector this year
• Fixed tax regime for construction sector to be applied on per square foot/yard of construction, which effectively means lower taxes for real estate
• Taxes on construction in the Naya Pakistan Housing Programme (NPHP) to be further slashed by 90%
• Withholding Tax on materials and services to be waived except for cement and steel industries
• Sales Taxes to be reduced in coordination with the provinces
• No capital gains tax on the sale of a family home
• PKR 30 billion in subsidy for the NPHP
• Construction sector to be given ‘Industry’ status
• A ‘Construction Industry Development Board’ to be developed for regulation and promotion of the industry

Short-term Measures: Providing a Short but Quick Boost

Of the various measure announced by PM Khan, most are aimed at helping the national economy, developers, builders and daily wagers in the short run. As a result, the construction sector is expected to be opened for business in about a week, and a host of taxes have been removed to encourage investment. Additionally, the cherry on top is that for the remainder of the year, no questions will be asked about sources of income of property investors.

Furthermore, not only have the taxes been waived at the federal level, but the provinces have also reduced their taxes. Just recently, the Punjab government announced extensive tax relief measures worth PKR 18 billion. A significant number of these had been aimed at the construction sector; with the following particularly significant:

• Reduction of Capital Value Tax (CVT) and Stamp Duty from 6% to 2%
• Suspension of service sales tax on construction sector

Now, the PM has also alluded to these measures in his speech. Effectively, all these steps provide a carte blanche for people to pour their investments in to the construction industry. In fact, investing in the NPHP is even better as it requires only 10% of the requisite tax to be paid.

Read: Construction sector relief package: Withholding tax on building materials abolished, stamp duty reduced

These measures are nothing short of an amnesty scheme, which allows the investors to regularise their funds and assets without much hassle for a period of several months — at incredibly low taxes. In turn, this should help provide a boost to the construction sector.

Industry Status: Regulating and Promoting the Construction

The government has coupled the abovementioned measures from construction-sector package with announcements that will truly boost both the economy and the construction sector. The most critical one is the provision of an industry status for the sector. This has been a longstanding demand of all the major builders and developers in the country.

While PM Khan has so far only announced that a Construction Industry Development Board will be established (aimed at promoting the construction industry), a number of other benefits are also expected to be announced. These include:

• The construction industry will be able to obtain loans at KIBOR rates
• The industry will have access and representation in chambers of commerce and industries. This will certainly help resolve a lot of issues faced by the real estate and construction industries
• Industry status will lead to better documentation that, in turn, results in a more efficient approval system for construction projects — boosting businesses in the sector
• A more stable and regulated construction sector means dependable and more trustworthy companies

Industry status also allows companies in the sector to create an extensive portfolio. Additionally, they will be able to join the stock exchange, sell shares, and generate funds through this method — resulting in a significant rise in the number of real estate firms on the stock exchange.

Pakistan’s real estate sector and, by extension, the construction industry has been at a bit of a standstill for quite some time. The taxes had been rising and there was no relief in sight to counter-balance this trend; but now, compensation has finally been provided. Not only will this construction-sector package provide a short-term boost to the construction sector and its numerous associated industries (and perhaps even the entire economy), it will also help in extensively stabilising, regulating, and promoting the construction sector in the long run.