Proposals for Federal Budget 2012-2013 Revival of Economy Through Revival Of Construction Industry

Karachi: 1. OVERVIEW

The Construction industry is the motivational force for the development of any economy and it carries greater importance in Pakistan as it consumes products of almost 100 industries whose production depends on the growth of construction industry. Real Estate development is regarded as the most essential sector of any economy in the world.

The Government of Pakistan realized the importance of the housing and construction industry and a National Housing Policy was formulated in 2001 based on the recommendations of Housing Advisory Board, which included ABAD as its member, to promote housing by giving incentives so as to bridge the ever increasing gap between supply and demand of houses but implementation of these recommendations is still a dream. The Government of Pakistan must provide incentives for development of construction industry as this is the key to clear the backlog accumulated due to absence of incentives.

According to State Bank of Pakistan Annual Report 2010-2011, the housing and. construction industry registered lowest growth in the decade. There are several factors responsible for this slow down in the growth. Despite this loss of growth in FY 2011, more than 12 Million people were employed in the construction industry in Pakistan which is the feeding arm of almost 100 industries including cement, steel, glass, sanitary ware, electrical goods, paints, hardware etc

The building Material index at 10.6% of Large scale manufacturing (cement. steel, paints, glass and plywood) is only an indication of the consumption pattern of only 5 major building materials used in the construction industry. If we calculate the total consumption of all building materials manufactured by 100 allied industries, that will show the role of construction industry in building the national economy.

2. INTERNATIONAL PERSPECTIVE

The building and construction sector has been used as a preferential choice to reverse the recessionary trend and help in the revival of economic activity. The public works programmes were used as tools for economic revival after the Great Depression of 1930s and the post Word War-II effects.

The important role of Construction sector can be assessed from the situation in US where public Works programmes were used to control the Recessionary pressure and the unemployment. In Malaysia also, the development of construction sector helped in overcoming the financial crisis of the late 1990s.The sector has been and still is in the neglected state and therefore has remained under developed in Pakistan.

The construction industry is a very significant industry as it is the largest employer in the world. It is estimated that 7 % of the total employed labour force in the world is in the construction industry. It is regarded as big international business as it employs about 100 million people and contributes 13.5% to G.D.P of the world.

The Construction industry is estimated to consume about 50% of the world resources. It is also a source of foreign exchange earnings for many countries of the world and Pakistan could also earn foreign exchange by developing this industry which would enable local construction firms to participate in construction projects overseas.

The role of construction industry can be assessed from the facts that it is about 9% of GDP in China which employs 7% of the total work force. The Construction industry in UAE accounts for 8% of GDP. In Pakistan, the share of construction industry in GDP is 2.5%

3. BACKLOG IN PAKISTAN

The construction industry in Pakistan is not provided any incentives or facilities by the Government. Rising prices of building materials is another factor contributing to slow development of construction industry. These factors have resulted in accumulating the backlog in providing housing units to the people. There is an annual shortage of roughly 0.45 Million to 0.55 Million housing units.

The baseline population of Karachi is estimated at 18 Million with an annual growth rate of 4.7%. Majority of the people belong to low and lower middle income group. Similar trend is expected in all major urban centers of Pakistan. Housing shortage is posing an alarming situation. The per Room occupancy in Pakistan is 6.7 as against 3.4 internationally. Houses which were built about 30 years ago are another problem as they have outlived their life and need to be replaced.

There is annual demand of 0.8 Million housing units but only 0.3 Million houses are built per annum. The backlog has compelled the people to go for slums and Katchi Abadis. This type of settlements can be seen in all major cities of Pakistan. There are several reasons for this situation which include increasing trend towards urbanization, unprecedented increase in population, mass scale legal and illegal immigration etc.

These factors also result in rapid growth of social evils and criminal activities grow beyond control which include land grabbing, encroachment, kidnapping for ransom, threats etc.

The housing needs for Karachi Region based on conservative estimates are 126,000 housing units per annum. The urban housing need in the country is estimated at over 3.1 Million and this figure is increasing due to increasing trend of urbanization and legal and illegal immigration.

4. FACTORS RESPONSIBLE FOR ACCUMULTED BACKLOG

a)SHORTAGE OF HOUSING FINANCE

The housing finance is the life line for growth of construction industry. The housing finance is mainly provided by the House Building Finance Co. Ltd. which was established in 1952. The HBFCL is the main lending authority for extending loan for house building in addition to other Development Financing Institutions. As at present the HBFCL is slow in disbursement of loans. Due to this situation, many projects have been put on hold as they could not get finance.

b) MORTGAGE TO GDP RATIO

The following table lists the Mortgage to GDP Ratio for some countries of the world which shows that the housing finance to GDP ratio in Pakistan is the lowest in the world.

 

Pakistan 1%
India 7%
China 12%
Thailand 17%
Korea 26%
Malaysia 29%
Singapore 32%
Taiwan 39%
Hongkong 41%
USA 80%
UK 86%

 

c) HOUSE BUILDING FINANCE CO. LTD. (HBFCL)

The HBFCL and the IFC through the Canadian Mortgage Housing Corporation did a study in 2006 which drew the conclusion that disbursement by HBFCL be raised to Rs. 9 billion in 2009 and be increased to Rs. 15 billion by 2014-2015. The Government of Pakistan and the State Bank should come forward to finance projects which require large amount of money. This could be of help to the construction industry as availability of finance on easy terms is the basic requirement for development and expansion of this sector.

5. SALES TAX ON CONSTRUCTION SECTOR

It is most regretfully pointed out that the Government of Sindh has not responded to the request of the construction industry which has during the last year raised voice against the levy of Sales Tax @ 16% in the Sales Tax on Services Act 2011.

This Tax imposed as Federal Excise Duty in the Federal Budget 2008 was abolished in the year 2011 through the Finance Bill and Capital Value Tax was already levied in 2010 by the province of Sindh. So, there was double taxation.

However none of the of the builders from the private sector was registered and no tangible revenue was generated, but the same was levied on residential and commercial plots and units vide serial no.9807.0000 of column (2) of the First Schedule to the Sales Tax on Services Act 2011 read with Chapter 98 of the Pakistan Customs Tariff. Most unfortunately, the construction industry has wrongly been treated as Services Provider.

A notification dated 24-08-2011 issued by the Sindh Revenue Board, Karachi added to the agony of the ailing construction industry. The following Table reflects the position:

GOVERNMENT OF SINDH

Sindh Revenue Board

(www.srb.gos.pk)

Karachi, dated: 24th August, 2011

NOTIFICATION (Sindh Sales Tax on Services)

No. SRB-3-4/2/2011. —– in exercise of the power conferred by sub-section (2) of section 8 of the Sindh Sales Tax on Services Act, 2011, the Government of Sindh is pleased to declare that the tax on the services provided or rendered by the persons specified in column (2) of the table below shall be charged and collected at the rate specified in column (3) of the table subject to the conditions and restrictions specified in column (4) of that table, namely:-

Table

 

Tariff heading No.

Description of services

Rate of tax Conditions and restrictions Date of effects

(1)

(2)

(3)

(4)

(5)

9805.3000

 

 

 

 

 

 

 

 

9807.0000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9823.0000

Services by Freight Forwarding Agents

 

 

 

 

 

 

 

Services by Property Developers or Promoters for:

 

a)       development of purchased or leased land for conversion into residential or commercial plots; and

b)      construction of residential or commercial units

 

 

 

 

Franchise Services

 

Rs.400/= per bill of lading

 

 

 

 

 

 

 

 

 

 

 

a)      Rs.100/=per square yard of land; and

 

 

 

b)      Rs.50/= per square foot of constructed covered area

 

10% of the value of service

Input tax credit/adjustment shall not be admissible

 

 

 

 

 

Input tax credit/adjustment shall not be admissible

 

 

 

 

 

 

 

 

 

 

 

 

 

Input tax credit/adjustment shall

1st July, 2011

 

 

 

 

 

 

 

 

1st July, 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st July, 2011.

 

 

The Association of Builders and Developers of Pakistan (ABAD) has agitated against this harsh levy on the following grounds:

1. Construction Industry is not a “Services” provider as wrongly and inaccurately conceived by the Sindh Revenue Board,

2. Immovable property such as residential and commercial plots and units (including flats and houses) is not covered by the sale of “Goods” as defined in clause (7) of Section 2 of Sale of Goods Act (III of 1930) which reads as under: “goods” means every kind of movable property other than actionable claims and money; and includes electricity, water, gas, stock and shares, growing crops, grass and things attached to and forming part of the land which are agreed to be severed before sale under the contract of sale”

3. Property in Law has permanent value it is not vanished by use, whereas service has temporary value and vanishes or diminishes its value after use. Property has in law, title, usage and transfer, as ingredients. It is temporary , not transferable and disappears after use.

Advertisements, Real Estate services of searching a house for someone, custom agents and courier services and like. We purchase land with title, Build and sell with title of 99 years so question of service does not arise. Nowhere in the world land is taxable under GST.

4. Levied only in Sindh and not other provinces and, therefore, discriminatory and against the basic spirit of the Constitution. Adjustment of Sales Tax on purchases made from other provinces may cause serious procedural problems.

5. Sales Tax, if passed on to the end users, mostly low middle class, will be unbearable for them and will also increase inflation.

6. The real estate sector is already paying Capital Value tax at the stage of transfer of landed property to the Government of Sindh. All other taxes which contribute to more than 7% of value of the property are already paid.

It has been brought to the notice of authorities concerned that the major irritant of Sales Tax may be considered with favour and not compulsion not only for the survival of the construction industry but also that of the buyers, who invariably belong to the lower middle class. Surprisingly, no positive response has been accorded to the genuine plea of the members of ABAD.

In view of the above, it is requested that this unjustified tax be abolished forthwith.

6.CONSUMPTION OF BUILDING MATERIALS

The economy of Pakistan is greatly dependant on the performance of construction sector. . The current per capita consumption of cement in Pakistan is 131 kg, which is the lowest in the region, as compared to 530 kg in Malaysia and 625 kg in China and the world average of 270 kg. The continuation of growth in the construction sector depends on the general economic pattern of recovery and on the initiatives for growth of this sector.

The consumption of steel in Pakistan is less than 37 kg per capita on the average which is much less than the world average of 200 kg per capita.

Main problem is the rising oil and steel prices in the international market. Both of these materials are imported and any fluctuation in their prices will affect the cost of housing units and their demand will move in the opposite direction. Also, the depreciation of Pakistan Currency has added to the woes of builders resulting in increased cost.

The disturbed supply and upward revision of power tariff has also added to the suffocation of building industry

All these factors are responsible for rising prices of construction materials which affected the price of raw materials and finished products used in the construction industry This included cement, steel, glass, paints, electrical goods, sanitary ware, electrical fittings etc.

7. PRICE OF CEMENT

Despite the fact that the Federal Excise Duty was withdrawn in the Federal Budget 2011-2012, the price of cement exhibited a steep upward trend without any apparent justification. The price per bag of cement, which was Rs. 270 in 2010 rose to Rs.365 in July 2011 and to Rs. 410 in September 2011. This rise was made possible through a cartel of cement manufacturers which resulted in raising cost of construction as cement is one of the important building materials along with steel.

8.FREEZE ON GAS CONNECTION FOR HIGH RISE BUILDINGS

Sui Southern Gas Company has announced freeze on gas connections for high rise buildings. This restriction has affected the development of construction industry as without this facility, the construction companies will not be able to give possession of housing units to the allottees. The so called high rise buildings are actually five individual houses in the horizontal order which is just the same as five individual houses in the vertical order.

These are used for residential purpose in the form of flats or apartments (as they are called when in the horizontal order) or houses on individual plots in the vertical order. Both are of the same size and therefore their requirements will not be different. We strongly request that this restriction on gas connections to so called high rise buildings be removed with immediate effect to provide a sigh of relief to construction industry and help in overcoming the backlog pile up.

It is high time that the Government must come forward to help the Construction industry by removing this freeze.

9. KARACHI ELECTRIC SUPPLY CO.

Karachi Electric Supply Company has been facing power shortage and applications for new connections have been pending for long duration. Even under Self Financing Scheme, the connections have not been provided though the applicants have made full payment.

This situation has also affected the delivery of housing units and the construction industry is finding it difficult to hand over the projects. Also, the continuous and unannounced increase in the tariff rates has affected the costing of the housing units The unannounced and long duration load shedding affects the level of activity in the construction industry. This situation is detrimental to the development of construction industry and it is suggested that the Government must take steps to improve this situation.

The katchi abadis can get a connection for Rs. 7000 to 8000 but for a newly constructed apartment the charges are Rs. 100,000 to 150,000 for electric connection which shows their apathetic attitude towards construction industry.

10.BUDGET SUGGESTIONS/RECOMMENDATIONS

i) Implementation of National Housing Policy

The Government must ensure implementation of all recommendations of the National Housing Policy 2001 for the development of construction industry..

The presumptive tax on construction companies should not be more than 1% on yearly receipts.

ii) Reduction in Stamp Duty:

Stamp duties and registration fee be adequately reduced to an aggregate 1%. Which will in turn increase government revenue as more documentation will take place.

iii) Credit facilities for Housing Industry

Banks and DFIs should extend credit facilities for balancing, modernization and replacement of machinery used in housing and construction industry and the State Bank should direct Commercial Banks to allocate a certain percentage of the credit to housing sector

State Bank to ensure a certain portion say minimum 5% of annual investment in housing mortgage from all commercial banks as that in agriculture.

iv) House Building Finance Co. Ltd.

The HBFCL and other financial institutions should prepare and introduce packages at preferential mark up to provide affordable credit to low income groups.

Minimum Rs. 10 Billion to be invested by HBFC on annual basis in small housing i.e. apartments smaller than 1500 sq. ft. and 120 sq. yards bungalows

Bridge financing and bulk financing of housing projects be introduced by HBFCL.

The annual disbursement of HBFCL loans should be substantially enhanced to Rs. 20 Billion to overcome the housing shortage

v) Duties and Taxes on construction industry

The Government should not charge stamp duty, registration fee etc on housing mortgage.

Duties and taxes on construction materials be rationalized and reduced to make construction affordable for a common man

vi) Import of Machinery for Construction industry

Import of the following plant and machinery for the construction industry should be allowed at zero rated duty:

a. New and used construction machinery including tower cranes and batching plants

b. Elevators/Lifts and Escalators

c. Generators 100 KVA and above

d. Solar Panels and allied equipment for self generation of energy

e. Equipment related to water treatment and reverse osmosis.

These steps will help in modernizing the process and improving the quality of construction.

vii) Research on Housing

The Government will promote research on materials for housing and construction by providing concessions and concessional finance.

viii) Economic Recovery

The Government must take initiatives for general economic recovery and public/private collaboration for the development of construction industry.

ix) Affordable Housing

The Government must initiate steps to support the affordable housing programme so as to quickly bridge the gap of backlog.

x) Law and Order:

The Government must ensure maintenance of law and order and create conditions essential for attracting domestic and foreign investment.

The Government must initiate steps to eradicate the menace of land grabbing, encroachment, kidnapping for Ransom, threat to life and property of builder and their staff

xi) Strategic Board:

The Government must initiate formation of a STRATEGIC BOARD with ABAD as a key member. This Board will coordinate with different Government Departments and utility companies to streamline all processes and give recommendation to promote construction industry.

xii) Infrastructural Development:

The Government must spend on the development of infra structure so the projects do not suffer just because of this deficiency.

xiii) Abolition of Sales Tax on Construction

The Government of Sindh must abolish the Sales Tax on Services which has been imposed on builders and developers in the provincial Budget for 2011-2012 as builders and developers are not service providers and they have been wrongly included in this category. Additionally, the builders and developers already pay taxes which add up to 7%. These taxes include stamp duty, Registration Fee, CVT etc. Any addition to these dues will make property expensive and out of reach of the common man.

For more information, contact:
S. Javed Jafri
Secretary General – ABAD
Association of Builders and Developers of Pakistan
ABAD House, ST-1/D, Block-16, Gulistan-e-Jauhar
Karachi – 75290
Pakistan
Tel: 021-34613645 – 47, 021-34613649
Fax: 021-34613648

   

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