Govt increasing cost of construction excessively, says ABAD chairman

Despite all issues, association satisfied with new tax regime

KARACHI: The construction industry will continue to grow but the government is unnecessarily increasing the cost of construction in the country, Association of Builders and Developers of Pakistan (ABAD) Chairman Hanif Gohar said in reaction to the measures taken by the government in the federal budget.

“The change in formula of federal excise duty (FED) collection on cement will increase cement prices. This will add to the cost of construction in the country,” said Gohar.



Finance Minister Ishaq Dar, on Friday, announced that the government intends to introduce a new formula to calculate FED on cement, which will be fixed at Rs1 per kg. The current mechanism is different as it is calculated on variable 5% FED on Marginal Retail Price (MRP) of a cement bag. The new FED collection method will increase the price of a 50kg cement bag by Rs25 to Rs35.

Cement prices are already higher in Pakistan compared to the region because of an active cartel of cement companies. We requested the government to break this cartel by allowing commercial cement imports, especially from Iran where the cement is much cheaper compared to Pakistan, but the government just took an altogether different move, he added.

“We fear that if we start importing cement from Iran, the government under pressure from cement companies will slap regulatory duty on imported cement. This is similar to what we saw in case of cheap Chinese steel imports when the government slapped import duties,” said the ABAD chairman.

Cement and steel approximately make up to 40% of the total cost of construction.



Despite the complaints, ABAD – an association of over 700 builders and developers – is very much pleased with the government for agreeing on a new tax regime in which the construction industry will pay a fixed tax. The finance minister announced the new tax measures for construction industry that are expected to generate Rs25 billion annually.



“We are very pleased with the government for announcing the new tax regime for builders and developers in this budget. This will end the bureaucratic blackmailing that builders usually face,” added Gohar.

Construction boom

The construction sector registered an excellent growth of 13.1% year-on-year in fiscal year 2016 compared to 4% average growth seen in the last four fiscal years, according to the provisional numbers made public by the Pakistan Economic Survey 2016, which was revealed on Thursday.

The survey also noted that construction related activities will gain further momentum on the back of increasing public sector development spending coupled with infrastructure and power sector development programme under China-Pakistan Economic Corridor (CPEC).



According to government assessments, construction sector contributes 2.4% in Gross Domestic Product (GDP), while it provides employment opportunities to 7.3% of the labour force. However, analysts say the size of this industry is much more than this because government numbers are based on the calculation of the last census which was conducted 18 years ago in 1998.

The construction sector is thriving, which is also evident from the growing cement sales in the country.

Despite record high cement prices (cement prices varies from Rs485 to Rs535 per 50kg bag in the country), statistics shows that the overall domestic cement sales grew by 17.29% year-on-year during the first ten months (Jul-Apr) of the ongoing fiscal year 2015-16.

Analysts say new tax measures announced in budget 2016-17 will be neutral for the cement industry as it will eventually pass on the taxes to consumers. There is high demand of cement and the cement companies are calling the shots. It’s a seller’s market.

Due to a construction boom, the capacity utilisation of cement plants is improving and is now close to 85%, the highest in a decade. Of the total installed capacity of 45 million tons, the industry’s surplus capacity stands at just 5.87 million tons – the lowest in the last nine years.

The writer is a staff correspondent

Published in The Express Tribune, June 6^th, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.