The success of small and medium enterprises (SMEs) is integral to economic growth. The construction industry boosts demand for local raw material, provides employment and generates tax revenue.
Investors, however, prefer to invest in real estate and the trading of open plots and finished buildings. It’s easier for investors to earn a capital gain and hide their undeclared income through real estate. But it doesn’t increase the flow of income through the economy, hindering economic growth.
The PTI government brought hope to the SMEs related to the construction industry. It announced the Naya Pakistan Housing Scheme and promised five million houses in five years. But the 2019-20 budget gives no sign of prosperity for the construction business.
The budget document incentivises investment in real estate while creating hurdles for the construction industry
Instead, it benefits those in the real estate business.
The 3pc tax imposed on not explaining the source of investment has been withdrawn. Non-filers can now buy immovable properties of any value and then sell them without paying any withholding tax after five years. Previously, it was 10 years.
Similarly, capital gains on the sale of immovable properties held for over five years will not be taxed at all. Moreover, the rate of withholding tax on the purchase of immovable property has fallen from 2pc to 1pc.
On the other hand, the construction industry is going to be adversely affected by this budget. The government has raised the excise duty on cement from 1.5pc to 2pc per kilogram. This will raise the price of a 50kg bag to Rs630 in the southern region and Rs580 in the northern region. A 17pc tax has been imposed on the sale of steel, which has raised its price to Rs110,000 per tonne.
Similarly, a 17pc sales tax has also been imposed on the marble industry. In addition, the increase in oil prices along with the depreciation in the rupee’s value against the dollar will further raise the cost of raw materials and hamper the industry’s growth.
These ‘reforms’ are only accommodating real estate investors and dealers with tax cushions. The budget has provisions for protecting investors’ wealth while making the industry a safe haven for money launderers. Former Finance Minister Asad Umar has even gone on record to say that “real estate sector in Pakistan is a totally grey area business.”
Meanwhile, investment in construction has been discouraged by increasing duties on raw materials.
The construction industry has the potential to help the economy at a macro level by providing daily wagers with employment. These people constitute a major chunk of the workforce and support related industries, such as cement, steel and paint. The promised Naya Pakistan Housing Scheme can provide blue-collar workers with low-cost housing. The scheme can also employ a large number of people to fulfil the government’s promise that it would generate 10m jobs in its five-year term. It can also convert katchi abadis into structured buildings. But the 2019-20 budget seems to protect the real estate market while creating barriers for growth in the construction industry.
Published in Dawn, The Business and Finance Weekly, July 8th, 2019