Incentive-package for construction industry

Amnesty, tax breaks & multiple reliefs

Huzaima Bukhari & Dr. Ikramul Haq

The Prime Minister of Pakistan, Imran Khan, in a Press conference on April 3, 2020, thinly attended by journalists after the bitter experience of March 24, 2020, announced what is termed by official quarters as a “comprehensive relief/stimulus package” for the construction sector—also given the status of industry. At the time of writing these lines, no official document is available containing draft proposals for different laws, notifications, guidelines, implementation plan etc. It is thus not possible to make a definitive analysis. This article only highlights the salient features announced so far and their likely impact on a sector that contributes significantly to the GDP absorbing a very large number of skilled and unskilled workforce, engaging many service providers and buying goods from nearly 70 other industries. We have also presented various opinions on this initiative taken to ward off some negative economic effects of Covid-19 epidemic and provide immediate jobs back to millions of daily wage earners. 

The main incentives, stimuli, reliefs at federal and provincial levels in addition to exempting construction sector from lockout from April 14, 2020 and establishment of Construction Industry Development Board to promote the sector, as reported in Press are:

• Status of industry to construction sector

Prime Minister has already approved the status of industry for construction sector. However, implementation of this decision was recommended to be deferred till next budget by Ministry of Commerce and Federal Board of Revenue (FBR). However, this decision is now implemented forthwith.

• Rationalization of Capital Gains Tax (CGT)
• Rate of tax be reduced in accordance with/proportionate to the increase in the valuation table.
•             CGT holding period for constructed property be reduced from 4 years to 3 years (as was the case prior to 2019).
•             CGT holding period for real estate/plots may remain 8 years, however, the rate of tax may be significantly reduced on sliding scale from fourth year onwards.
• Valuation of real state/plots

FBR has already initiated the process of fresh valuation of urban real estate in consultation with the real estate organizations of respective cities. The process will be expedited as a part of package announced by the Prime Minister.

• Rationalization/reduction in sales sax on sonstruction material

       To bring down the cost of construction, sales tax and excise duties levied                         on construction material are to be reduced suitably.                       

• Tax incentives

Source of investment 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 been waived off, except on cement and iron.

Tax on builders and developers 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.

E-stamping system is being introduced by all provinces in line with the system already introduced by Punjab and it will be expedited.

• Exemption of taxes on first house

Construction, purchase/sale of first house should be exempted from all taxes, including capital gains tax.

• Establishment of special circles

FBR to expedite establishment of already approved automated special circles for construction industry to ensure easy and transparent tax collection.

• Measures for creating ease of doing busines

The process of fresh master planning/updating of existing master plans and zoning already initiated by provinces may be expedited.

Reduction in project approval time (preferably to 45 days), by all provincial governments/respective development authorities by issuing No-objection Certificates (NOCs), automation and concurrent processing of approvals, strictly in accordance with laid down timelines. Wherever possible NOC regime be replaced with compliance of bylaws regime (after introducing fresh zoning bylaws).

All provinces/development authorities are in the process of introducing fully automated one window portals for processing approvals and all other client services/facilitation and it will be expedited.

Policy on high rise construction has already been approved by the Prime Minister. Notification to this effect has been issued for Islamabad Capital Territory (CT), however, the same has yet not been issued for other major cities/urban areas that must be done on priority basis.

• Housing/mortgage financing

Subsidy of Rs. 30 billion is announced for projects of NAPHDA. In line with 7% interest rate offered to industries for Greenfield Projects, subsidy/lower rates (preferably 6%) 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.

• Legal issues – civil procedures ordinancde/special benches

Ministry of Law and Justice is working on a Civil Procedures Ordinance for ICT, which after approval will be shared with provincial governments, for implementation in all provinces. The Law Ministry is also working on constitution of special benches for hearing civil disputes/cases concerning real estate/construction sector.

While announcing the package incentives, the Premier’s main emphasis was on boosting the construction sector “with a view to keep the wheels of economy moving, mitigate impact of the lockdown on people and to facilitate the daily wagers”. He said that the government was also making a strategy for those who cannot afford to pay house rent.

While acknowledging the construction industry as the second largest sector in the country providing employment to the people, the Prime Minister reiterated that “the government wants to create a balance between maintaining a lockdown and keeping the construction sector running to save people from hunger and poverty”. It may be recalled that in third quarter of Fiscal Year 2019, due to wrong tax policies of the coalition Government of Pakistan Tehreek-i-Insaf (PTI) in Finance Act 2019, construction sector witnessed a sharp contraction of 7.6% in FY19 from 8.2% growth during FY18”.

The Chairman Association of Builders and Developers of Pakistan (ABAD), termed the tax incentives announced by Prime Minister Imran Khan as “a historic package for the construction industry of Pakistan and this package will prove a turning point for the economy of Pakistan”. In a statement, he said that ABAD was demanding incentives for the construction sector “because more than 70 allied industries are depending on construction sector. He said, “We are indebted to Prime Minister for reviving the construction industry”.

In out last column [Covid19-pandemic, leadership & apathy, Business Recorder, April 3, 2020], written before the announcement of package for construction industry, it was proposed that if the PTI Government “wants to avoid deep recession, overcome economic toll during and after the lockdown, it must announce a comprehensive relief plan for real estate, housing and construction sectors that should be at least a 10-year tax holiday”. The package announced on April 3, 2020 though provided immunity from probe in respect of investment failed to give a 10-year tax holiday, so that all stakeholders can make investment and prepare long-term plans.

The wizards sitting in Ministry of Finance and Federal Board of Revenue (FBR) have failed to realise that long-term tax relaxation for the real estate/housing/construction sectors is beneficial as over 70 industries are linked to the these sectors and Pakistan needs millions of houses every year. This measure alone can avoid recession, revive economy and provide employment to millions. We also made it clear to the economic and tax managers that it would be a win-win situation as “tax concessions to real estate, housing and construction sectors will be set-off automatically by higher turnovers of industries allied with them, besides giving these capacity to retain employees and revival of industries hit by the lock-down and contraction in demand”.

We specifically highlighted that the construction industry in return must provide full social protection and universal entitlements to its workers. Needless to point out that construction industry absorbs both skilled and unskilled workforce on a large scale. Once construction boom takes place in any economy, demand for numerous industries supplying goods and services also increases giving impetus for creating more and more jobs. The Prime Minister was reminded that once it was his main agenda. We demanded that in the package, the PTI Government should confirm that after the declaration of the construction as industry all the employees, workers, permanent or on contract, would come under all the relevant labour laws related to Social Security, Employees Old Age Benefits, Workers’ Welfare Fund etc.

There are almost 70 industries within the supply chain of construction industry, ranging from cement to steel, bricks and blocks, prefab structures and construction support materials, to plastics to electrical and mechanical fittings to bulbs, lights, electronics, to paint to steel and aluminum windows, doors to glass, to wood to kitchen and bathroom fittings, just to name a few; in addition to many service providers. It is fair to conclude that since construction is to be treated as industry, so builders, big and small, will have to register all their employees with departments, federal or provincial, dealing with social security, old-age benefits, contributions to workers welfare fund and in case of companies, 5% profit sharing under the Companies Profit (Workers’ Participation) Act of 1968, so that all workers get all benefits under the law. However, the economic team of Prime Minister and FBR stalwarts as usual demonstrated a myopic outlook and just announced some cosmetic concessions and yet another amnesty for whitening undeclared funds that in the long run may not promote construction as a vibrant industry. Unscrupulous elements can possibly abuse these incentives for undue personal gains only.

The Prime Minister and his economic wizards must realise that having vibrant real estate, housing and construction sectors, with proper zoning and regulations for urban development in particular [see extensive work of Dr. Nadeem Ul Haque, Dr. Muhammad Naveed Iftikhar and many others] will certainly revive downstream industries, especially in terms of accelerating growth and creating jobs and its spiral cascading impact.

The critics say that in Pakistan, most wealthy people invest in real estate and construction to whiten their ill-gotten and/or untaxed money and therefore, they will be the real beneficiaries. By and large, the majority of economists agree that resumption of construction activities can revive employment, generate supply of goods and services, having a potential to kick-start the economy that is much needed, but in the wake of coronavirus outbreak, circumstances for these are not favourable.

The former Adviser of Ministry of Finance, Dr, Ashfaque Hassan and Dr. Kaiser Bengali, former Adviser Sindh government, both renowned economists, are of the view that “Prime Minister Imran Khan’s package for the construction sector is ‘good on paper’ but may be hard to implement because of the difficult economic situation in the country, consequent to the coronavirus outbreak”.   

Some experts are pleading that in difficult times, like we are facing along with many other countries of the world, the governments, instead of foregoing taxes and giving immunity from probe in investment, prefer investment in more infrastructure projects, giving work to contractors, creating jobs, training people to develop capability and capacity and encouraging small & medium enterprises (SMEs) as well as offer generous incentives, including low-rate loans, for those who can invest in creating jobs. However, the economic team of Prime Minister says these experts must realise that the federal and provincial governments have no money to invest in any infrastructure projects.

Ali Khizer in an op-ed [Construction package: cautious optimism, Business Recorder, April 5, 2020] raised a valid question about the package: “will this help bridge the housing gap? On the onset, many builders and developers will avail this to start the projects before Dec 2020 to get amnesty. This will generate an economic push, but how real this could be would depend on other factors that are deterring housing to reach its potential”. Another big problem, he opines, “is the mistrust between builder and buyers (consumers). The usual model is that projects are financed on consumer advances. Builders try to minimize risk by taking out equity in early stages of projects. The risk is skewed towards investors (buyers) and if the project fails there is no mechanism for buyers to get the money back. This can be addressed by having a custodian in between. This can be ensured by proper bank guarantees mechanism”.

Ali Khizer observed: “A swift regulatory regime is imperative for this. RERA (Real Estate Regulatory Authority) should be formed to ensure buyers protection and to ensure zoning and other laws implementation in letter and spirit. Haphazard development could have its own implication. A Construction Industrial Development Board is to be formed which will give construction an industry’s status. Let’s see how this board will be able to bring discipline to developers. At this moment, most developers do not even have proper maintenance of financial accounts”.

Ali Khizer concludes in ‘Construction package: cautious optimism’, Business Recorder, April 5, 2020 that “undoubtedly this is an employment intensive sector and it has a spillover on dozens of other industries. Having said that, the housing gap is huge and more interventions are needed to plug the supply-demand gap”.

Scholars and researchers at Pakistan Institute of Development (PIDE), in a preliminary brain storming session, via online platform on April 6, 2020, observed that “there is nothing in the construction concession package that would help anyone in the sector other than the well established contractors, there is a whitener scheme, and nothing in return for society or the workers in the sector”. It was pointed out that this package:-

1. “does not really target the needy market but is rather an impetus to overall housing construction industry; as such it should not be under the NAPHDA
2. the unsupplied targeted by NAPHDA will find it very difficult under the current economic slowdown to invest and start any kind of buying/building
3. target right now can be those wanting to invest and build up a supply of the target housing required by NAPHDA
4. for these investors who in the right spirit of trying to keep the construction industry going in times of COVID-19, a different approach can be formulated which targets: (i) ability to invest without documenting source of investment and (ii) ability to deposit cash in escrow accounts linked to such construction.
5. There should be a clear preference towards high-rise construction over stand-alone houses in a housing scheme model”.

A report [Construction package: IMF links it to certain conditions Business Recorder, April 5, 2020], sheds light on the main reason why the incentives announced by Prime Minister inadequately address the construction industry as an engine for growth. It says that the stance by the International Monetary Fund (IMF) was that the government package for construction industry should be with “stringent conditions of timelines, nature and goals, aimed at providing support to the most vulnerable segments of the population, suffered due to COVID-19 crisis”. The report says that it was confirmed by Teresa Dabán Sanchez, IMF Resident Representative in Pakistan and government officials while talking to Business Recorder. This exposes the claim by the Prime Minister that he takes decisions after deliberation with his advisers, experts, Cabinet, and after independent application of mind, keeping the best interest of the country.  

Replying to a query, the report says, the IMF official said: “The Fund is providing advice to member countries in these difficult times. Our advice is that whatever policy action the governments implement have to be targeted, temporary and focused on providing support to the most vulnerable segments of the population”. The same was the “advice” for Pakistan”, IMF Resident Representative said. 

The report says that the Federal Minister for Planning and Development, Asad Umar, also told Business Recorder, that the package for construction industry was approved after consultations with the IMF. “Yes, Prime Minister Imran Khan contacted Managing Director IMF and took on board on the package for construction industry,” said Umar, adding that the package came after consultation with the Fund as “Pakistan is in the programme”. When he was asked by Business Recorder for comments on the package approval by the IMF without IMF Executive Board approval Umar replied, “it is their problem how to deal with their Board and not ours”, says the report.

Above is the reality of package announced for the construction industry. Thus Dr. Kaiser Bengali rightly said that he did not see the lockdown being lifted in the next couple of weeks, and the package was “just an announcement”. He added that “economy does not work with packages, and the country’s policies are not in the right direction”.

The fact, as revealed in the report, is that “incentives package comprising tax exemptions and subsidies of Rs. 30 billion for the construction industry in order to increase employment opportunities in the country in the wake of coronavirus outbreak” was issued under the policy guidelines of IMF and not based on work done by scholars, who have already done credible and pragmatic research studies to show how we can achieve progress and growth by undoing flawed urban development policies [Pakistan’s Urbanization: Policy Brief Series, Wilson Centre, Washington]. We thus ignore indigenous solutions, presented by local experts and follow failed policies of the lenders/donors like IMF, World Bank and others. None of these institutions in their solutions [papers and plans] for Pakistan to become economically sound, ever quoted from the remarkable work of Dr. Nadeem Ul Haque, Looking Back: How Pakistan Became an Asian Tiger by 2050.

There is need for the Prime Minister to understand that change of ministers/advisers alone will not serve the purpose. What we need is fundamental structural reforms as highlighted in ‘Need for all-out reforms’, Business Recorder, March 20 & 26, 2020 and prudent policies and avoid failed prescriptions of IMF.

Critics say that the package for construction industry, as dictated by IMF, can help those who could not avail money whitening schemes of 2018 and 2019. They say that corrupt public office holders, who were not qualified for asset-whitening schemes, may exploit it through their proxies, front-men and benamidars (name-lenders). The new chairperson of FBR (Shabbar Zaidi, appointed as Chairman FBR for a period of two years, on honorary/ pro bono basis in May 2019 went on medical leave in January 2020, was finally removed on April 6, 2020) will have to face tough challenges as her predecessors gave unprecedented benefits to tax evaders even when we had details of their assets at home and abroad—she will have to incentivise the businesses in extreme difficulties and encourage growth that will automatically enhance revenues. At the same time she will have to recover billions lying unpaid by the rich and mighty that can immensely help their countrymen, especially those who due to present lockdown cannot meet their daily need for food.     

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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)