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February 17, 2021

Construction incentives

February 17, 2021

A lacklustre economic performance and Covid-19 were compelling factors to announce a special incentive package for the construction sector by the prime minister on April 3, 2020.

Promotion of construction as an industry was the hallmark of this announcement. The recently announced extension in the incentive package for another year, along with an amnesty for another three months, has also been well appreciated by the Pakistani business community.

The amnesty scheme was introduced for the construction sector and people were allowed to invest in the real-estate sector without disclosing the source of income. It attracted a good number of builders and contractors, who started investing in this sector, and generated healthy competitive economic activity. But it was a time-bound scheme – supposed to last till December 31, 2020. Now that the government has extended the facility, that’s really an appreciable step in the right direction.

The salient features of this incentive package were, among other points, to introduce a fixed tax regime for builders and developers; exemption from application of Section 111 of the Income Tax Ordinance, 2001 on investment in new projects/purchase of plots; and exemption from requirement of withholding tax on acquisition of services relating to construction. Along with new projects, it also included existing incomplete projects to benefit from this package, as builders were allowed to self-declare the percentage of completion of their projects on the relevant date.

For low-cost housing like the Naya Pakistan housing scheme, 90 percent reduction in tax liability was part of the scheme. The facility was obviously not available to public office-holders and the application of Section 111 was just limited to public companies not covering such other income like proceeds of crime; hence it was a very attractive scheme which generated a lot of economic benefits.

The amnesty scheme for the construction industry was the outcome of the adverse impact of the coronavirus outbreak at the start of this year and Pakistan benefitted from the concessions given by the IMF. Such concessions were observed in the form of reduction in interest rates by the State Bank of Pakistan from 13.25 percent to 7.00 percent, as well as the present construction-sector incentives. These concessions, in fact, generated a lot of economic activity in the form of job creation, export promotion and improvement in large-scale manufacturing.

In a way, Pakistan withstood the bad impact of the Covid-19 pandemic and tackled it in a far better way than most of the countries of the world including our neighbours. At least the job market was stabilised due to this incentive package and the poor started earning something during the horrific corona days.

The economy is an integrated model. According to some of the estimates, there are almost forty different industries benefiting only from the construction sector. Right from cement, steel and machinery, to labour, capital and banks – all are beneficiaries of such industrial economic activity. It has given a lot to the poor of this country, who are the real asset of this nation, and the prime minister has rightly realised their woes in the prevailing situation of the worst kind of pandemic.

Hence, there is an immediate need for discussion on the subject to derive benefits out of this invaluable contribution of the construction industry. We are at a point where a continuous stream of income is absolutely needed to remain on the path of economic headway boosting the recovery process.

It is my considered opinion that the incentive package in the form of an amnesty scheme may, at least, be extended for another year to better counter the bad effects of Covid-19. It is time the government of Pakistan acted to save the poor of this country from the wrath of this pandemic. And this is the only way forward to achieve a high trajectory path to economic recovery.

The writer is an economist.