Builders demand tax reforms to revive construction sector

ABAD chairman’s budget proposal urges removal of regulatory duty on steel bars

KARACHI, PAKISTAN:

In a bid to revitalise the struggling construction sector, which is currently operating at only 50% capacity, builders have submitted a comprehensive budget proposal to the government, urging a thorough review of taxes and duties pertaining to the industry.

Association of Builders and Developers (ABAD), Chairman, Muhammad Altaf Tai emphasised the importance of removing the existing 30% regulatory duty on the import of steel bars to help the industry. Under HS code 7215.10, the imposition of regulatory duty has given an unfair advantage to a cartel of large-scale steel manufacturers, resulting in a steep increase in steel bar prices to Rs 300,000 per metric tonne.

“As a consequence, 50% of all ongoing construction projects have come to a halt,” said Tai. He further highlighted that no new projects are expected to be launched during Eid, when expatriate Pakistanis usually invest in real estate and construction.

To put the situation into context, local cement dispatches, a crucial segment of construction activity, saw a 14% decline in the first 11 months of fiscal year 2023, totalling 36.53 million tonnes compared to the previous year. Similarly, export sales plummeted by approximately 20% during the same period, reaching 3.99 million tonnes.

According to cement sector analyst at Insight Research, Ali Asif, the decline in cement sales can be attributed to rising construction costs, economic slowdown, high interest rates, the Public Sector Development Program (PSDP), reduced private sector spending, and lower exports due to uncompetitive prices.

Removing the regulatory duty on steel bars will not only stabilise their prices in Pakistan but also enable the government to earn taxes of Rs 80,000 per metric tonne, which is currently zero. This move will make the local steel bar market more competitive, benefiting the 72 allied industries associated with the construction sector and safeguarding millions of jobs.

Chairman ABAD noted that projects under sections 100C and 100D have a completion deadline of September 30, 2023. However, due to the prevailing challenging economic conditions, including a 200% increase in construction material prices and higher borrowing costs from banks, construction activities have significantly slowed down. To avoid complications, litigation, and protect the investments of end consumers, the date of completion for projects under these sections should be extended to September 30, 2024.

Tai emphasised that the final tax paid by projects registered under these sections is a full and final tax, which is not adjustable or refundable. While this policy was highly appreciated by the construction industry and resulted in a significant increase in tax revenue, the imposition of tax under section 236C on projects registered under sections 100C and 100D has created double taxation, which should be rectified immediately.

The proposal also includes revised capital gains tax rates, where no tax shall be levied beyond 5 years of ownership. If a property is sold before the 5-year mark, the following rates should apply: 10% if sold within 1 year, 8% if sold within 2 years, 6% if sold within 3 years, 2% if sold within 4 years, and 0% if sold after 5 years.

Furthermore, the deemed income tax imposed under section 7E should be omitted from the law due to its regressive nature. The mortgage finance policy for home financing needs to be revived, with an interest rate of 5% for loans up to 10 million. The State Bank of Pakistan should set targets for banks to allocate a minimum of 10% of their deposits for home financing. The difference between the Karachi Interbank Offered Rate (KIBOR) and the minimum rate of 5% charged by banks should be subsidised by the government.

Tai suggested a reversal of the tax imposed under sections 236C and 236K to 1% for filers and 2% for non-filers. He also proposed the revival of weekly Housing Task Force Meetings to be chaired by either the prime minister or finance minister.

Published in The Express Tribune, June 4^th, 2023.

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