“Biggest Growth Engine”

“Biggest Growth Engine”

     From January 1, 2021, Pakistan’s housing sector is likely to witness an unprecedented boom — thanks to the Naya Pakistan Housing Programme, which focuses on low-cost housing in both urban and rural areas. A number of low-cost housing projects across Pakistan are being launched by developers and builders, boosting demand in affiliate industries of the construction sector and creating new jobs.

     The government has announced a tax incentive scheme for developers and builders under which they are required to declare a project and deposit their undeclared money into dedicated bank accounts as allocated amount for the projects.

     The significance of the incentive scheme is that those persons availing immunity are required to complete projects by September 30, 2022. In case of failure to meet the deadline, the undeclared money will be added to the income and tax authorities will recover income tax on normal rates besides imposing fines and penalties.

     Experts believe that the announcement of the unprecedented incentive package for the construction industry will open new opportunities for investment and development and play a key role in reviving the national economy.

     Pakistan faces a shortage of around 12 million housing units. However, the government aims to build around 5 million housing units under the Naya Pakistan Housing Programme, for which the prime minister announced the first ever package in the country’s history for the housing sector.

     Mohsin Shekhani, Patron-In-Chief, Association of Builders and Developers (ABAD) shares his views about the housing package.

Mohsin Shekhani 4 copy | Special Report from Narratives Magazine
Mohsin Shekhani

     What’s the government’s incentive package to boost the construction industry?

     Developers and builders will not be questioned about their source of income if they invest in the sector by registering with the Federal Board of Revenue (FBR) by December 31, 2020. The registrations for new developments and projects will be processed by the government within 45 days. However, the incentive is subject to the condition that the grey structure of projects must be completed before September 30, 2022 to avail the incentives. Further, taxes will be computed according to the size of the property (per square foot or per square yard), instead of the price of the property, which was the case previously, and, as a result be substantially lower.

     Are provinces relaxing the sales tax on services?

     Yes. Sales tax on builders and developers at the time of sale of property will be levied by all provinces at fixed rates of Rs. 50 per square foot for builders and Rs. 100 per square yard for developers. Further, builders and developers may not be required to withhold tax when purchasing building materials (except steel and cement) and on certain services (such as plumbing etc). This is beneficial to companies that manufacture and sell such materials (e.g. marble, wood, tiles etc.) because they will no longer be required to declare sales tax on their sales. Sales tax on construction services will be exempted by all provinces, provided the builders and developers are chargeable to sales tax at the fixed rates mentioned above, at the time of sale of property.

     What are the benefits for builders and developers on construction under the Naya Pakistan Housing Programme?

     If builders and developers take on a project related to low-cost housing under the Naya Pakistan Housing and Development Authority, then the relevant taxes will be reduced by 90 percent.

     Is there any incentive for purchasers of housing units in declaring a source of funds?

     The law has been amended and the first purchaser of a building or a unit in the building is not required to explain the source of funds used for purchase from a project registered with the FBR under this scheme. Further, people selling their houses for the first time will be exempted from several taxes, including capital gains tax, stamp duty, advance income tax, registration fee etc.

     Is the government supporting the programme through a subsidy?

     The prime minister announced Rs. 30 billion subsidies for the poor, and this subsidy would cater to the first 100,000 houses to be constructed under the Naya Pakistan Housing Programme — which means a subsidy of Rs. 300,000 on each house. Those borrowing from the bank to construct their homes would get loans on a subsidised interest rate of 5 percent for a 5-marla house and 7 percent for a 10-marla one. The State Bank of Pakistan (SBP) and all other banks have been advised to set aside 5 percent of their portfolio for the construction industry.

     What are the other initiatives to make the programme successful?

     A one-window operation, under the Naya Pakistan Housing Authority, has been launched in all four provinces. A National Coordination Committee on Housing Construction and Development has also been set up to attend to the various obstacles. Taxes have been reduced in the provinces and the complicated procedure of getting NOCs (No Objection Certificates) has been eased out.

     To what extent has ease been provided?

     The decision makers deserve credit for successfully convincing the international community to allow this amnesty of sorts in view of the country’s ailing economy. Expensive bank loans — coupled with cumbersome paperwork, involving guarantees in particular — have thus far discouraged people in Pakistan to exercise the mortgage option to build or purchase a home.

     Do you think the government is serious about accomplishing the task?

     The prime minister unveiled the plan for revival of the construction sector after the maiden meeting of the newly formed National Coordination Committee on Housing and Construction. The incentive package is evidence of government interest. There will be a 90 percent tax exemption on construction activity related to the Naya Pakistan Housing Programme. The general sales tax has been reduced from 15 percent to two percent, while withholding tax has been abolished on construction material. The plan will make it affordable for low and middle-income people to build houses with low rate mortgage financing.

     What is the role of the State Bank of Pakistan (SBP) in facilitating the Naya Housing Programme?

     The SBP has announced several regulatory measures to facilitate the housing programme. Under these regulatory provisions, commercial banks would allocate five percent of their portfolio for construction activities. Some Rs. 20 trillion was circulating in the informal, unregistered economy and this is the opportunity for people to get this huge amount of money declared by investing in the real estate sector by December 31, 2020. It is a fact that now a person with an income of Rs. 30,000 to Rs.  100,000 could build a 5-marla house with mortgage financing at 5 percent.

     The SBP also decided to set a mandatory target for banks so as to extend mortgage loans and financing for developers and builders.

     Will the housing programme be beneficial for other industries?

     The initiative under the programme will be a jumpstart for the economy and will also prove to be the biggest growth engine. Besides job creation, the housing scheme may revive around 40 other allied industries.

Special Report