Package may not reboot construction

Updated April 06, 2020

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Sources in the construction sector believe that a lot of people are likely to take full advantage of the three-month amnesty on investments to be made in this sector till the end of the present fiscal year. — File
Sources in the construction sector believe that a lot of people are likely to take full advantage of the three-month amnesty on investments to be made in this sector till the end of the present fiscal year. — File

THE raft of fiscal, monetary and policy measures proposed by Prime Minister Imran Khan last week to reboot the dormant construction sector is likely to generate little activity, and that too not before Eidul Fitr. And if the coronavirus threat persists for a longer period — and it appears it will linger at least through 2020 — the construction ‘relief package’ will not produce the desired impact on the economic activity in the near term.

Nevertheless, sources in the construction sector believe that a lot of people are likely to take full advantage of the three-month amnesty on investments to be made in this sector till the end of the present fiscal year. The relief package will enable them to free up funds stuck in real estate or bring their hidden stashes into circulation. The amnesty offered is suspected by many to be one of the main objectives of the relief measures.

Conversations with some leading real estate developers and builders in Lahore show few expect the incentives to immediately propel economic activity. They were of the view that the government also realises that it will not be easy to revive construction activity in given circumstances with people withholding spending amidst coronavirus fears and economic uncertainty created by the global pandemic the world over.

Yet they pointed out that the amnesty given on fresh investments in real estate over the next three months provide people that have ‘black money’ means to legalise their existing holdings or ‘whiten’ their money through new property purchases. The extreme slowdown in the property/real estate business since the announcement of measures announced by the government in the last budget to vigorously document the economy is said to have sucked a large portion of liquidity out of the economy.

Broadly, the construction package carries sweeping tax incentives, waivers and subsidies besides the government’s decision to bring the construction sector in the fixed-tax regime and offer additional benefits on investments in low-cost housing under the Naya Pakistan Housing Scheme.

The government also upgraded the construction sector to industry status, which facilitates builders and developers to obtain bank loans at the rate of 7 per cent.

Investments in the prime minister’s housing programme would be eligible for an additional tax rebate of 90pc of the total calculated fixed tax on the constructed area and bank loans at a subsidised rate of 6pc. The government has set aside Rs30bn to subsidise projects under the Naya Housing Scheme, which was launched to construct 5 million low-cost housing units in the country for the lower-middle-class families.

The package allows resumption of construction activity across the country from April 14, the day the country-wide restrictions on all kind of business activities, except essential services, will be lifted.

The decision has been taken by the federal government in consultation with the provinces. However, the builders do not expect actual construction activity to start before June as the majority of migrant labour will not be back from wheat harvesting before Eid-ul-Fitr. “The activity will at best begin only after the end of the monsoon rains in the country — provided the government can control the spread of the pandemic — as it takes quite some time to remobilise equipment, material and labour for larger housing and commercial projects,” a leading contractor said. “Until then, you may see individual families trying to complete the construction of their homes here and there.”

Overall, the industry appears quite happy with the measures announced by the prime minister who also proposed to set up a development board for the construction industry to address the issues it faces.

Important measures proposed in the package include the rationalisation of Capital Gains Tax (CGT) by reducing its rate to 2pc from 5pc in accordance with the increase in the valuation table, and slashing the CGT holding period for constructed property from four years to three years (as was the case before 2019). The families selling their house will be exempt from payment of the tax on gains.

Additionally, builders and developers will not be required to withhold tax on the purchase of building materials except for cement and steel and the provinces will reduce sales tax on construction services to 2pc. Punjab and Khyber Pakhtunkhwa have already cut the rate.

The construction industry is the largest sector of the economy after agriculture with annual spending fluctuating between 10-12pc of GDP. Many argue that the package was meant for encouraging construction.

“The government appears to be encouraging the construction of commercial buildings, low-cost housing, apartments and offices through the measures it has proposed,” said a senior architect. The only incentive on real estate or plots given in the package relates to the reduction in stamp duty from 5pc to 2pc that will cut the transfer charges, he added.

According to him, the measures should in the medium- to long-term discourage speculative investment in real estate. He said it was yet unclear if the amnesty on the source of income applied on real estate/plots or not.

Published in Dawn, The Business and Finance Weekly, April 6th, 2020