Ordinance for the Construction Industry of Pakistan:
COVID-19 has stalled the economic activities across the globe. UN has stated that world economy is facing the worst meltdown since the Great Depression of 1930’s. The current economic crisis is termed as The Great Lockdown. Advanced economies are sending checks to their residents but third world countries are facing the social challenges due to the limited resources. To help the daily wagers, Pakistani Government has decided to kick start the construction activities in Pakistan. The government has just passed an ordinance for the construction industry of Pakistan.
Salient features of the Ordinance for Construction Industry of Pakistan:
Special Tax Provisions for Builders and Developers
- Income under this regime will be treated as a separate class of income, wherein tax will be computed on the basis of per square foot construction and per square yard land development for builders and developers respectively.
- No withholding tax on construction materials except for cement and steel.
- While declaring their net wealth builders and developers can take profit from projects up to ten times of tax paid.
- For low cost housing projects like Naya Pakistan Housing Program tax is reduced by 90%.
Exemptions from Provision of Section 111 of Income Tax Ordinance 2001 / EXEMPTION FROM DECLARATION OF SOURCE OF INCOME
- Applicable to existing incomplete projects and new projects starting before 31st of December 2020 but completed till 30 September 2022.
- Both new and existing projects would have to get registered with FBR by filing a prescribed form on IRIS web portal.
- The amount invested within this period should be declared in the wealth statement.
- However, public office holders, their benamidar, spouse and dependents cannot claim exemptions.
Capital Gain Tax (CGT)
- CGT holding period for constructed property is reduced from 4 years to 3 years.
- CGT holding period for plots remains 8 years, but the rate will be significantly reduced on sliding scale from fourth year onward.
Exemption of Taxes on First House
- Construction, purchase or sale of first house is exempt from all taxes including the Capital Gain Tax.
Tax Incentives by Provincial Revenue Authorities (PRAs)
- Sales Tax on builders will be levied by the provinces at the time of the sale of property at fixed rate of Rs 50 per square foot.
- Sales Tax on developers will be levied by the provinces at the time of the sale of property at fixed rate of Rs 100 per square foot.
- Low cost housings like Naya Pakistan Housing Scheme will be exempted from all provincial taxes.
- All provincial taxes (municipal taxes, duties, fees, registration fees and transfer charges) for urban properties will be clubbed under one head and charged at the rate of 2% of the property valuation.
- E-stamping system being introduced by all provinces.
FBR Valuation of Real Estate (Constructed Property and Plots)
- FBR has already initiated the process of fresh valuation of urban real estate.
Reduction in Sales Tax on Construction materials
- In order to bring down the cost of construction, sales tax and excise duties levied on construction materials will be reduced.
The Ordinance will fail to stop the property price crash:
Reason #1: No more dead Investment in Real Estate Sector:
Many people consider this relaxation as another amnesty scheme to whiten the black money; this is not true. This scheme is not for the people to trade the plots only. To avail this scheme people have to construct the plots. Secondly they will have to be filers to avail this scheme. FBR will check the transitions and will give time to the people to be filers. This scheme is different from the past amnesty schemes. Because no one can simply invest in plots. But this time they have to construct the plots.
Reason #2: Purchasing power of local Pakistanis has declined:
The first buyers of real estate in Pakistan are the local Pakistanis called the genuine buyers. But due to the lockdown people are worried about the survival of their families instead of investing in real estate. Millions of local Pakistanis have lost their jobs due to the economic meltdown caused by COVID-19. The purchasing power is down so prices will fall to match the low purchasing power.
Reason #3: Pakistani Expatriates Losing Jobs:
Historically the end buyers of luxury real estate are the Pakistani expatriates working in UAE, Qatar, Kuwait, Saudi Arabia, Europe, Australia, UK, USA and Canada. Millions of Pakistani expatriates have lost their jobs. The high real estate prices in Pakistan are in part due to the high purchasing power of the expertise. But when they are losing jobs then who will buy properties? Simply a big price crash.
Reason #4: Selling pressure of the desperate sellers:
Coronavirus has simply converted Pakistan into a cashless society due to the freezing incomes. Many people are willing to sell their properties to get cash but no genuine buyer in the market. There are more properties in the market than the buyers. Over supply of properties has already destroyed the real estate market of Dubai where prices have decreased to the level of 2008. Can we imagine a different outcome for Pakistan?
Reason #5: Pakistani property market follows the global trends:
Global economy is already in recession thanks to the Corona Virus. World is facing the worst mortgage payment and foreclosure crisis. Property prices are crashing worldwide; so a re-run of 2008 events but on a larger scale. If we observe the real estate trends of 2008, Pakistani and Dubai Real Estate Markets were the worst hit markets in the world. The situation will be even worst this time as financial crisis is more severe. Therefore get ready for a big price correction across the world and Pakistan.