Amid frustrating COVID-19 blues, there has been a lot of good news too in Pakistan during the last week. Firstly, Pakistan received major debt relief from G20 in addition to securing an emergency loan of $1.4 billion from IMF under the Rapid Financing Instrument (RFI) to mitigate the adverse economic impact of the pandemic. Secondly, in a surprise move, the State Bank of Pakistan lowered the benchmark interest rate from 11% to 9% in a bid to help troubled businesses in the country. Thirdly, Pakistani rupee has shown some tentative signs of recovery in the foreign exchange market. Fourthly, a record single-session gain at Pakistan Stock Exchange has been observed when the benchmark KSE-100 index skyrocketed over 1,500 points in a single day. And finally, unveiling its proactive and impressive policy for the construction sector, the federal government has announced a massive stimulus package for it.

The government has approved an industry status for the construction sector after announcing establishment of a Construction Industry Development Board. The Tax Law (Amendment) Ordinance, 2020 has also been formally promulgated to give effect to the much-awaited incentive package. The construction sector is considered the backbone of the country’s economy since there are almost more than fifty industries and businesses associated, directly or indirectly, to it. If effectively implemented, this construction policy would prove to be an economic game-changer. It would also pave the way for the incumbent PTI government’s promised national agenda of providing 10 million jobs and 5 million houses to Pakistanis.

The most important aspect of the government’s current incentive package is providing a significant immunity or exemption to investors, builders and developers from the purview of Section 111 of the Income Tax Ordinance (ITO), 2001 whereby they will not be questioned about their source of funds/equity if they choose to invest in the construction business under the new construction policy. A similar exemption will also be available to the ‘first purchaser’ of newly-constructed buildings. However, public office holders will not be eligible to benefit from this policy. Nor will the proceeds of crimes or terror financing get such exemptions. Section 111 of ITO is an important tax provision which authorises the FBR to asses and tax individuals’ unexplained and undeclared income. Successive governments in the country have been offering various tax amnesty and assets declaration schemes by relaxing this tax provision. These schemes have allowed individuals to declare their hidden or undeclared assets after paying a small fraction of such assets as tax. The current amnesty scheme is essentially a pro-investment initiative, and different from the previous ones since it requires individuals to invest their funds in construction after duly declaring them rather than only paying some amount to the government to whiten their black money.

Over the last two or three years, the government has introduced too much regulation in the name of tax reforms or otherwise to document undocumented economy. At the same time, there has also been a lot of statutory regulation in compliance with the FATF’s AML/CFT recommendations. Moreover, our premier anti-graft watchdog NAB has also been sending negative signals to the business community. These developments have virtually destroyed business and investment environment since it is believed that the size of country’s informal economy is roughly equal to its formal or documented economy. The current amnesty scheme may not be ideal or appropriate, but Pakistan certainly needs such policies to stabilise its troubled economy and to break the vicious cycle of poverty.

The government’s incentive package offers investors to conveniently opt for a fixed tax regime rather than paying taxes under the complex regular tax mechanism. Such tax liability will further reduce by 90% for building low-cost housing units. The government has also exempted the builders/developers from the cumbersome statutory labiality of collecting advance withholding tax on goods and services they receive under Section 153 of ITO except cement and steel sectors. This move will not only help ease of doing construction business but also provide relief to low-income technicians and wageworkers in the industry. There will also be no Capital Gain Tax (CGT) upon the sale of constructed residential property in some cases. It is also quite encouraging that, in addition to the federal government, the provincial governments have also offered some tax concessions to construction industry in terms of Sales Tax on Services and Capital Value Tax (CVT).

There remains another issue which is a hindrance to the growth of this industry; the non-availability of housing or mortgage finance facilities, or the availability of such facility only at high interest rates in Pakistan. Traditionally, our commercial banks have refrained from extending financing facilities to the housing sector on the pretext of inadequate or ineffective legal framework available in the country for the recovery of non-performing loans. In particular, they have reservations over weak foreclosure laws – the laws that provide a legal process by which a lender takes control of property, and sells it to recover the sum of money advanced by him in accordance with the mortgage contract.

In Pakistan, the legal framework available to financial institutions to recover their loans has essentially two components. The first one involves securing a decree from a banking court for the recovery of outstanding debt by any creditor financial institution. This is usually a speedy process which is governed by the Financial Institutions (Recovery of Finances) Ordinance (FIO), 2001. The second step relates to the execution of such decree whereby the court auctions the mortgaged property to pay off creditors. This process is conducted under the provisions of the Code of Civil Procedure (CPC), 1908. There are obviously some inherent flaws in the CPC, which cause inordinate delays. In fact, Section 15 of FIO, 2001 contains the foreclosure provisions which empower financial institutions to sell a mortgaged property without the intervention of any court after adopting a due legal process. However, such provisions have been suspended by the country’s superior judiciary for being in violation of the Constitution.

The weakness of foreclosure laws appears only to be an excuse since commercial banks usually recover their corporate, commercial and consumer loans through the same legal framework in Pakistan. Nevertheless, the government may introduce special legislation to minimise procedural delays in the execution of banking courts’ decrees. Moreover, the Central Bank should also devise a robust but pragmatic lending policy to encourage commercial banks to extend financing facilities to the construction sector in addition to enhancing the lending capacity of public sector housing finance institutions like the HBFC. The success of the construction policy is contingent upon effective enforcement and success in restoring investors’ confidence in the country.

Mohsin Raza Malik

The writer is a lawyer. He can be contacted at