In the midst of the coronavirus pandemic, Prime Minister Imran Khan has announced a landmark incentive package for the construction industry with a view to expand the ailing economy and to cushion the catastrophic impacts of lock down in the country. In a moment, when a country could plunge into an economic and social crisis owing to skyrocketing inflation, unprecedented surge in the unemployment rate, and a sharp rise in poverty level followed by nationwide lockdown, the announcement of such a much-needed package for the construction sector can be a new deal for the country’s economy.

The construction sector is one of the largest sectors that accounts for 2.5 per cent of the total GDP of Pakistan. According to Economic Survey of Pakistan 2018-19, the sector employs 8 per cent of total labour force and it is also associated indirectly with 16 per cent of the total employed people as more than 40 allied industries such as electronics, steel and Iron industry, wood products, and cement industry are directly related to the construction sector. Most importantly, according to economic survey statistics, the construction industry has replaced the energy sector in attracting the highest net Foreign Direct Investment of $386.8 million in the FY 2019.

According to the Economic Survey of Pakistan 2018-19, the construction sector experienced a negative growth of 7.57 percent in the FY 19, in a sharp contrast to a growth rate of 8.2 per cent in the FY 18. As a result, allied industries in the construction sector didn’t perform at optimal levels in the fiscal year. Low spending on PSDP in the last few years, the requirement of money trials from investors, assessment of income, actual valuation of real estate by FBR, requirement of CNIC, restriction on sale of construction material, restriction on non-registered clients on more than 10 million transactions were some bottlenecks that had prevented the investor from pouring their capital into the sector; consequently, it resulted in the dismal performance of construction and its allied industries.

Under the incentive scheme for the sector, which will be enforced after the promulgation of Presidential Ordinance, fixed tax regime irrespective of the profit margins will be introduced for the developers and builders. The sector would not be asked for the provision of the source of money in case of purchasing or construction of residential or commercial buildings. The waiver of 90 per cent tax will be granted to those investors who will invest their capital in the construction projects under the Naya Pakistan Housing Program (NPHP).

Mortgage financing will be provided for the low-cost construction of houses on very low interest rate of 6 per cent. The high rise construction policy has also been approved under the scheme. Withholding tax on all building material, except steel and cement, would not be charged. Developers and builders would get a tax credit with 10 multiples of the tax already paid under the scheme. Capital Gain Tax holding periods for constructing property have been fixed 3 years instead of 4 years.

Fresh valuation of real estate, Substantial reduction in sales tax and federal excise duties on construction material, exempt of all taxes including CGT on first purchase or sale of a house for a family are also part of an incentive program. Subsidy of Rs30 billion would be granted under NPHP. The Construction sector has been granted a full status of Construction industry; and for the promotion of the sector, Construction Industry Development Board would be constituted.

There would be multitudes of short-term and long-term benefits of the incentive scheme for the construction sector; on one hand, it will help to mediate the shocks of lockdown by providing employment to skilled, semi-skilled, non-skilled, daily wagers, and labourers in the current situation, while on the other hand, it will not only help in overcoming the housing units in Pakistan, but also will stimulate the economic boom in the long term. It will help to overcome economic stagnation — that was prevalent in the last few years — by circulation of cash in the market and pouring domestic as well as FDI in the country.

Pakistan is the country of 207 million people with a very high population growth of 2.1 per cent. It is expected to reach 403 million by 2050, according to a UN report. The country is facing a severe shortage of housing units. According to the World Bank Report, there is a total backlog of 10 million housing units and a demand of building 400,000 housing units annually. According to a recent study by the Urban Unit in Punjab, there lie 68 per cent vacant plots in recognised housing schemes.

With the exemption of withholding tax on building material, reduction of sales tax and excise duties on construction material and a waiver of 90 per cent tax on the condition of investment in NPHP will prompt investors to construct low cost houses on vacant plots. These initiatives will help to overcome the shortage of housing units in Pakistan.

Creation of jobs and pouring of domestic and foreign investment into the sector will provide, on the one hand, employment to the labourers and daily wage workers during the pandemic, while on the other hand, will spur economic growth in the country. Investment in the construction sector will build new housing units, high buildings, and commercial centres; consequently, it will reduce rents and improve quality of life. Improved infrastructure will give a boost to businesses, thereby creating more jobs. Enhanced business activity and expansion of the economy will raise per capita income of people, which will help in the reduction of poverty in the country.

There are some challenges too which entail the formulation of well-articulated standard of procedures and mechanism in order to protect the interest of end-users under the scheme. The incentive scheme can lead the surging rates of properties and make it impossible for the middle and lower middle class to acquire property.

Similarly, some developers and builders might build homes under NPHP to distant places without taking into account the factors of targeting, long-term affordability, occupancy, maintenance, community development and social infrastructure. Poor choice of location and designs, a focus on quantity over quality and looming risk of corruption in the projects are some serious and major concerns which demand urgent attention in order to strike a balance between the interest of end-users and the construction sector.

The writer is CEO of Multiplierz group.