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April 5, 2020

Relief for builders

Editorial

 
April 5, 2020

In an effort to deal with the terrible dilemma brought by the coronavirus which has forced lockdowns and resulted in the further collapse of an economy which was already on the decline before the illness hit, Prime Minister Imran Khan after a meeting of the National Coordination Committee has declared the construction sector an industry. By providing it incentives, he has said the PTI government hopes to open up employment for people, allowing them some means to earn livelihoods. The incentives include a guarantee that no questions would be asked about how any individual or group obtained money to be used to buy property and construct on it. Construction is a must for the amnesty to kick in. A subsidy of Rs30 billion has been given to the Naya Pakistan Housing Project. Fixed tax on construction will be brought down from 90 percent to 10 percent.

These indeed are giant incentives. The construction industry, if it is active, provides large-scale employment in many different areas. There are however some questions that must be asked. With an economy that was already on the downslide, the question is if people actually have black money pocketed away and whether they will now be ready to bring it out and put it into construction. To some degree, this may indeed happen, but it is also true that upper- and lower-middle income groups have been suffering from the economic slowdown for some time. The problem has been one of a lack of demand for new construction. People are not willing at this point to put resources into building new homes. There are too many necessities to find money for. The amnesty scheme also means the issue of black money raised again and again by the PTI government has effectively been shelved. True, we are living in a time of crisis. But given that Pakistan continues to face FATF sanctions and that the PTI government can have no idea what the future holds, this is a decision that may come back to haunt Imran.

There is also the matter of whether people in rural areas who build small houses, often using their own labour, will actually benefit from this scheme. It is best suited to those setting up larger houses in urban areas or entire housing schemes. The impact will become clearer only over the coming months. We need to see if money which has been hidden away suddenly resurfaces, or if realistically speaking people have already whisked it away overseas and remain unwilling to show its existence. This is also not an appropriate solution in the long run. The PTI had been crying foul at previous tax amnesties and exemptions, but for the past nearly two year, has itself indulged in the same practices that were anathema to it before assuming power in 2018. Surprisingly, the government has not lifted the withholding tax on cement and steel industries. Similarly, no capital gains tax on sale or purchase of houses will substantially reduce the government's potential to collect revenue. The reaction of the IMF is still awaited on this move as it was opposed to such concessions in the past. Once the corona crisis is over, the government must come up with a comprehensive plan to extend the documentation of the economy which is a major characteristic of modern economies. We can’t just go on providing relief to the undocumented economy and then expect international financial institutions to help us.