Construction Industry on the right path in the year 2020-2021

The construction industry is known to be the backbone of every economy worldwide and when the construction industry is on the rise, it usually signals a growing economy. Pakistan’s economy is slowly improving and different measures are being taken to enhance the construction sector. The policies of the current government specifically after COVID19 look promising. Some of these policies were announced in the budget while others were announced in the Finance Bill. Policies made in the budget 2020-2021 may have a very positive impact and the sentiments from the construction industry are really positive. The following are key points regarding the construction industry in budget 2020-2021 and the Finance Bill by the government of Pakistan: 

1. Disclosure of source of investment is not mandatory for the construction of new projects
2. Fixed income tax rate
3. Eligible Developers and Builders will be exempted from Withholding tax on purchase of building materials
4. Cement Industry Reliefs
5. Reduced markup rates
6. Section 235B of I.T.O (Income Tax Ordinance), 2001, Omitted Brief description of these points and their impacts according to the experts at FF Steel are discussed next:

This article was written by the R&D department of FFSteel with expert opinion by the following:

Fayaz A.Jarral
FCA Chief Financial Officer
A qualified accountant, CMA, AMMAOfficer- USA finance professional, having 2 decades of strategic management experience.
Akbar Ismaili
ACIS | Company Secretary
22 years practical experience in various sectors in textile, chipboard and match industries.
Muhammad Zeeshan
CA Finalist | Manager Taxation
A Graduate of economics from University of Punjab. CA Finalist from ICAP(The institute of chartered accountants of Pakistan).Previously working as a senior auditor and tax associate, at PKF FRA CHARTERED ACCOUNTANT FIRM ISLAMABAD, from 2014 to 2018

1. Disclosure of source of investment is not mandatory for the construction of new projects

The Law:
• Section 111 of Income Tax Ordinance 2001

The Change:
• Disclosure of source of investment is not required in case of construction of new residential/commercial building or first purchase of a newly constructed project.

The Effect:
– Attraction towards investment in construction industry.
– Ease of doing business.
– Creation of jobs and investment opportunities.
-This will be very beneficial forthe construction sector as a lot of investment would be done without the lengthy process of background checks and money trail.

2. Fixed Income Tax Rate

The Law:
• The Construction package 2020

The Change:
– Dividend paid to steel or cement shareholders will have a deduction of 10% tax where as dividend paid to shareholders of a company dealing with building and developing which lies under the construction industry will be exempted of such a tax 90% waiver in tax is allowed to those investors who will make invest in the construction projects under Naya Pakistan Housing Program (NPHP)
– Under the incentive scheme for the construction sector, a fixed tax regime irrespective of the profit margins will be introduced for developers and builders.
– A government official announced that they had devised a new taxation system for builders to offer relief in taxes. He further said, that builder will pay PKR 250 per square feet on units sold in commercial and residential buildings in Islamabad, Lahore, and Karachi, whereas builders engaged in the sale of property units in Peshawar, Rawalpindi, Hyderabad, Multan, Faisalabad, Gujranwala, Sukkur, and Sahiwal will pay PKR 230 per square feet. The rate for urban areas is PKR 21 0 per square feet.

The Effects:
– This will certainly enhance the investment in this housing program and attract investors as it provides favourable grounds.
– This show how eager is the government to make this housing scheme successful and would provide further incentives in the future to the investors. Resultantly investors would feel secure in investing in this housing scheme.
– Builders’ profitability will be increased as they will pay less tax.
– Construction industry will flourish.

3. Eligible Developers and Builders will be exempted from Withholding tax on purchase of building material

The Law:
• Section 153(lncome Tax Ordinance, 2001 ).

The Change:
• Eligible Developers and Builders will be exempted from withholding tax on the purchase of building materials under section 153 of the Income tax Ordinance 2001 except for Steel and Cement.
• Provided that those cement and steel manufacturers having exemption certificate u/s 153, no withholding tax will be made from them.

The Effect:
– This change would reduce the cost of construction for builders significantly and provide ease of doing business.

4. Cement Industry Reliefs

The Law:
• Finance Bill 2020

The Change:
• Reduction in Federal Excise Duty on cement from Rs 2/kg to Rs 1 .75/kg.
• Under the income tax and sales tax, FBR implements a relief of Rs20bn through a decrease in Rates of With holding Tax. Out of which Rs13bn due to a reduction in the rate of withholding tax on

The Effect:
– Reduction in the price of cement.
– Boost to the construction industry.

5. Reduced Markup Rates for Housing

The Law:
• Development Authority Bill 2019

The Change:
• Rs30bn subsidy for Naya Pakistan Housing Project.
• On the construction of first 100,000 houses the government would provide a subsidy of Rs300,000.
• People who obtain loans from banks to build their homes will be offered a subsidized interest rate. The interest rate for 5-marla house will be 5% and for 1 0-marla house it will be 7 %.
• The government has also talked with the State Bank of Pakistan (SBP) and all other banks that they should set aside 5% of their portfolios for house financing. This comes to about Rs330 billion. Banks current exposure to the construction sector is 2% of the overall credit to private sector and 1% of the overall advances.

The Effect:
– A rise in investment.
– Construction on a large scale at a low price.
– A rise in the demand for cement and steel. (Estimated ~1mn tons for cement and 1 50k tons for steel bars).
– 20 million people in Pakistan are homeless, the effort to create sustainable housing at a cheap rate would increase the number of people who can afford housing and decrease the number of homeless individuals. -House financing in Europe through banks is at 90%. In Pakistan it is meager at 2%. The steps taken by the government will increase the percentage of financing done by the banks which will facilitate middle class of the society to afford housing at a cheap rate.

6. Section 23B of I.T.O 2001 Omitted

The Law:
• Non-Applicability of 153 of The Income Tax Ordinance, 2001 (1 )(a) to steel Melter and composite steel units as payers [Clauses 9A.]
• Section 235BTax on steel Melter and composite units

The Change:
• The Finance Bill 2020 seeks to omit this clause in line with the deletion of Section 235B for steel sector.
• The Finance Bill 2020 proposes to withdraw the collection of advance tax from steel Melters and composite steel units.

The Effect:
– This tax was non-adjustable and its withdrawal will provide relief to this sector.
– The omission of 235B would reduce the cost of compliance for taxpayers and promote ease of doing business. In simple terms, steel melters and composite steel units will have to pay their taxes as per actual instead of depositing advance tax.

According to the Economic Survey of Pakistan 2018-19, the construction sector had a downward trend of 7.57% in FY 19, in sharp contrast to a rise of 8.2% in FY 18. As a result, allied industries in the construction sector didn’t perform at optimal levels in the fiscal year. Some of the reasons for this could be:

– Low spending on PUBLIC SECTOR DEVELOPMENT PROGRAMME (PSDP) in the past few years.
– The need for money trials from investors. Assessment of income.
– An actual valuation of real estate by FBR.
– Need for CNIC.
– Restriction on sale of construction material.
– Restriction on non-registered clients on more than 1 0 million transactions.

These were some bottlenecks that had prevented the investor from pouring their capital into the sector; consequently, it resulted in the poor performance of construction and its related industries. In the fiscal year 2020-2021, the government has facilitated and taken measures that are productive for the construction industry. The construction industry as a whole is on the right footings and the right playground to exploit all the opportunities which the government has provided them, this year.
The government, despite restrictions and the recession because of the pandemic, expects revenue from the construction industry.

Let’s hope that these policies bear fruit and after a bumpy start to 2020, the construction industry revives and starts an inclined trend on the progress graph.

Now that the correct measures have been taken, the stakeholders of construction industry finally have a beacon of hope. This hope may lead to some concrete development in the infrastructure of Pakistan. Incentives provided by the government will put the whole industry on an upward slope of success. A bright future is foreseen for the construction industry in the upcoming few years.