New taxes deal a blow to all-important real estate development

They say taxes will increase price of already expensive housing units.

Shahram Haq July 18, 2013
Private sector real estate developers are a little bit confused after the Punjab government imposed a 16% tax on new housing units. PHOTO: REUTERS

LAHORE: Construction and housing is one of the critical sectors that powers the economic engine of a country, provides support to more than 30 allied industries and creates direct and indirect employment opportunities for not only skilled people but also semi-skilled and unskilled workers.

In developed economies like the United States, European countries and Gulf states, the housing and construction industry contributes around 8-12% to the gross domestic product and is considered vital, the slump of which can disturb their economies.

Unfortunately in Pakistan, despite being the economic engine and employment generator, housing and construction is not viewed as a proper industry. Experts believe that the industry’s current 2.3% contribution to the GDP is not enough and the share should at least be somewhere around 5%.

Following the announcement of budget in June, private contractors do not seem to be very much interested in housing projects, including 1,000 new Ashiyana Housing Schemes with a minimum of 500 units each. Under these schemes, at least 500,000 units will be built across the country.

Private sector real estate developers, which were hitherto doing exceptionally well, especially in Lahore, are a little bit confused after the Punjab government imposed a 16% tax on new housing units. The Sindh government has also levied the same tax.

“We were hoping for some incentives for the private developers, but instead tax has been imposed, which will create loopholes in the housing sector, as the developers will find it difficult to pay 16% tax on a single housing unit,” said Muhammad Ramzan Sheikh, Chairman of Mainland Husnain Constructions, while talking to The Express Tribune.

The tax will be collected on the cost of land excluding other expenses. For instance, if the total price of a complete unit is Rs10 million, of which the land cost is Rs5 million, the contractor will pay Rs0.8 million as tax.

However in addition to this, the federal government has levied a tax of Rs50 per square yard on constructed area and Rs100 per square yard on developed area, which private contractors and developers will pay. This will add up more than a million rupees to the cost of a complete housing unit, depending on the price of land and constructed area.

“The burden will be passed on to the buyer, this will increase the price of already expensive housing units,” Sheikh said.

The developers will try to sell houses as individual owners to avoid taxes, but this will put immense pressure and the industry might collapse, if things remained the same, he added.

Pakistan is short of more than seven million housing units. Annual housing needs are around 500,000 units, but only about 270,000 houses are constructed in a year, leaving a shortfall of 230,000 units.

To bridge the widening gap, the private contractors and developers have been playing an important role for the last one decade as several new housing societies have appeared on the map during the period and much more are in the pipeline.

Private housing societies provide residents with a sense of modern lifestyle with complete security arrangements. However, government’s housing societies lack such facilities.

“If the industry gets some tax relaxation and incentives, its contribution to the GDP in coming years will be more than double compared to where it stands now,” Sheikh said.

What the private developers and contractors needed was an even playing field not only in the housing sector, but in the overall construction industry, he added.

Published in The Express Tribune, July 19th, 2013.

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Cobra Commander | 10 years ago | Reply

The tax is imposed on these construction giants and they pass it on to the poor consumers???? They make it look like as if its the government fault for increasing the prices. The construction companies should be paying taxes from their own pockets , they should be contributing to the overall economy by paying taxes but they are passing the buck to the end user. Basically these guys want the end user to pay the taxes for them. Unbelievable...... I hope the government deducts tax from there year round sales rather then per house as this is the only way to make sure end users are not burdened further.

Twister | 10 years ago | Reply

Yet another case of whining and screaming by the relatively rich the way, to cite an example, in Australia, newly constructed residential property does have 10% GST levied on it, on its first sale in addition to stamp duty and council rates (the local term here for municipal taxes). Subsequent sales of the same property don't attract GST.

If this screaming by lobby groups is given too much attention, then the whole economy might well be tax free, because every industry will come up with the same excuse of "supporting jobs". Well reality check, you're not creating jobs out of goodwill.

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