Proposals for provincial budget 2012-2013 Revival of economy through revival of construction industry

Karachi: 1. PREAMBLE

Economic development in the Province of Sindh should be the main issue of concern for the Government of Sindh. The economy of Sindh has been equally affected like rest of the country from the after effects of terrorism, land grabbing, encroachment, law and order, ransom and bhatta, unemployment etc All these factors have affected the rate of economic development and revival of the economy adversely with the result that the overall situation of the province is moving in the reverse direction. This sort of situation requires corrective steps at rapid pace to set the economic development in the right direction.

The above mentioned situation reveals some horrendous facts which need redressal without loss of time. Economic recession leads to unemployment which causes growth of criminal tendencies specially among the youth. Kidnapping for ransom, land grabbing, encroachment, bhatta, street crimes etc.are the net result of unemployment. Good governance therefore demands a preferential treatment to be accorded to an industry like construction which creates innumerable jobs directly and also by helping the growth of over 70 allied industries like cement, steel, glass, timber, sanitary wares and fittings, tiles etc.

2. 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 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 by the Government of Sindh. 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:

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 servicesRate of taxConditions and restrictionsDate 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. No where 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.

3. VALUATION OF PROPERTY

The Chief Inspector has been notifying the valuation of urban property since 1986. For the purpose of valuation, the urban property had been classified into six categories (I to VI) depending on the location of property. Further, the properties are classified into Residential, Commercial and Industrial, The value of each plot is assessed on the basis of location of each open plot and the area of each built up plot.

We give below the comparative chart which will confirm that the charges for registration have been increased by more than 100% during the period 2009 to 2011

COMPARATIVE CHART OF VALUATION AND REGISTRATION EXPENSES

It will be noted from the Comparative chart given below that the valuation of property was increased tremendously in 2011which adversely affected the already ailing industry.

RESIDENTIAL PLOTS
2009/2010                                                                                           2011/2012

OLD RATES NEW RATES

1200 Sq. Yard. (Category A-I)
RATE Per Sq. Ft.4950RATE Per Sq. Ft.14850
VALUE OF OPEN PLOT4950×1200=5940000VALUE OF OPEN PLOTS14850X1200=17820000
STAMP DUTY (3%)178,200STAMP DUTY(1%)178,200
REGISTRATION FEE (1%)59,400REGISTRATION FEE (1%)178,200
CVT 4%237.600CVT 3%534,600
TOWN TAX (1%)178,200
TOTAL475,2006%1,069,200

2009/2010                                                                                   2011/2012

1200 Sq. Yard. (Category I)
OLD RATESNEW RATES
RATE Per Sq. Ft.3850RATE Per Sq. Ft.9625
VALUE OF OPEN PLOT3850×1200=4620000VALUE OF OPEN PLOTS9625X1200=11550000
STAMP DUTY (3%)138,600STAMP DUTY(1%)115,500
REGISTRATION FEE (1%)46200REGISTRATION FEE (1%)115,500
CVT 4%184,800CVT 3%346,500
TOWN TAX (1%)115,500
TOTAL369,6006%693,000

COMMERCIAL OPEN PLOTS

2009/2010                                                                                               2011/2012

1000 Sq. Yard. (Category A-I)
OLD RATESNEW RATES
RATE Per Sq. Ft.11500RATE Per Sq. Ft.34500
VALUE OF OPEN PLOT11500×1000=11500000VALUE OF OPEN PLOTS34500X1000=34500000
STAMP DUTY (3%)345,000STAMP DUTY(2%)690,000
REGISTRATION FEE (1%)115000REGISTRATION FEE (1%)345000
CVT 4%460,000CVT 2.5%862,500
TOWN TAX (1%)345,000
TOTAL920,0006.5%2,242,500

2009/2010                                                                                                 2011/2012

1000 Sq. Yard. (Category I)
OLD RATES

NEW RATES

RATE Per Sq. Ft.8625RATE Per Sq. Ft.21563
VALUE OF OPEN PLOT8625×1000=8625000VALUE OF OPEN PLOT21563×1000=21563000
STAMP DUTY (3%)258,750STAMP DUTY(2%)431,260
REGISTRATION FEE (1%)86250REGISTRATION FEE (1%)215,630
CVT 4%345000CVT 2.5%539,075
TOWN TAX (1%)215,630
TOTAL690,0006.5%1,401,595

 

4.BACKLOG IN HOUSING.

The reasons for backlog in the housing sector in Sindh are the same as for rest of the country. No special incentives are provided by the Government of Sindh to overcome the shortage 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. Housing shortage is posing an alarming situation in Pakistan.

The per room occupancy in Pakistan is 6.7 as against 3.4 internationally. There is an annual demand of 126,000 housing units for Karachi region based on conservative estimates

The Provincial Government should initiate steps to support the affordable housing by providing state land and housing finance at concessional rates. This would help to quickly bridge the gap of backlog and overcome the shortage in housing.

5. 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 adequate financial assistance

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

The HBFCL and the IFC through the Canadian Mortgage Housing Corporation carried out a study in 2006 which drew the conclusion that disbursement by HBFCL be raised to Rs. 9 billion in 2009 and 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.

6.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 requirement of utilities 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 irrational discriminatory freeze.

7. KARACHI ELECTRIC SUPPLY COMPANY (KESC)

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 cost 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.

8. BUDGET PROPOSALS/RECOMMENDATIONS

The Government may ensure implementation of the following recommendations for development of construction industry as formulated in the National Housing Policy of 2001.

i) Abolition of Sales Tax on Services

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 they0020 0020have 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.

ii) Implementation of Housing Policy

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

iii) Duties and Taxes on Construction Industry

Stamp duties and registration fee be adequately reduced to an aggregate 1% as the construction industry is already paying taxes of more than 7%.

All new construction on plots up to 150 sq yards and flats and apartments having an area of 1000 sq. ft. should be exempted from all taxes for a period of five years.

iv) Research for Construction Industry

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

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

v) Credit for Construction industry

The Government should motivate the Commercial Banks and the DFIs to extend loans for the housing sector to help them in their expansion and development projects.

The Government should provide finance at subsidized rate of mark up to promote affordable housing for the low income segment of the society. Duties and taxes on building materials be rationalized and reduced to make construction affordable for a common man. The Government must initiate steps to control the prices of cement and steel.

vi) House Building Finance Co Ltd.

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

vii) Economic Recovery

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

viii) 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.

ix) 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 recommendations to promote construction industry.

x) Revival of Housing Industry

Last but not the least the Government must initiate steps to accelerate the housing activity and contribute towards employment generation by facilitating the provision of housing inputs including land, finance, building materials etc.

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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