The chatters of a relief package for the construction industry in Pakistan have been
making rounds for a week and are expected to be announced today. Reeling from a
massive plunge in the economic activity, the GoP is pinning hopes on the revival of the
construction industry to create mass employment opportunities. According to the
information available, the package constitutes the following.
i) Fixed Tax Regime for Builders and Developers: Income under this regime will be
classified separately and will be computed using per square foot construction ad
per square yard development. Builders and Developers are not required to
withhold tax on purchase of building materials except Cement, Steel and other
services. Moreover, imputing income equal to 10x the tax paid under this regime
is allowed in declaring net wealth.
ii) Exemption from Section 111 of Income Tax Ordinance: Construction activity will be
exempted from section 111 of the Income Tax Ordinance till June 2022 on the
purchase of land, the construction of any structure on prior-owned land or first
purchase of newly constructed property. This, in effect is a de facto amnesty for
investment in the Real Estate sector.
iii) Ease of Doing Business: Approval time to be reduced to preferable 45 days by
introducing a one-window operation for all provincial and federal approvals.
iv) Cheaper Financing: The package is expected to offer a 7% interest rate for
Greenfield Projects in low cost housing along with preferable 6% interest rate for
100,000 low cost houses on Mortgage.
v) Capital Gain Taxes to be reduced: Capital Gain Tax is going to be reduced
correspondingly to the increases in the valuation rates. Implementation of Capital
Gain Tax holding period requirement to be reduced from 4 years to 3 years for
constructed property. However, Capital Gain Tax on real estate/plots may remain
for 8 years with a cascading sliding tax rate after 4th Year.
vi) Reduction in other taxes: Sales tax and Excise duty imposed on Construction
Materials would be reduced. Most importantly, purchase/sale of first house will
be exempted from all taxes, including Capital Gain Tax. E-stamping would also be
introduced and provincial taxes would not be imposed on Low Cost housing under
Naya Pakistan Housing schemes.
Cement sector to bode well if said package materializes: We believe that the GoP is
attempting to rejuvenate the construction sector by offering a de facto amnesty till
June 2022 towards investments within the sector, likely in an effort to enable
potential job creation.
The cement sector has already reacted to this news since the announcement from the
PM yesterday. There are expectations of increased emphasis on the construction
sector with this package likely to spur demand of cements and other building material
post the coronavirus episode. We believe the cement sector will welcome these
developments, which have the potential to alleviate the sector’s prime concerns
including low utilization levels, and high leverage. Moreover, an expedited monetary
easing cycle and plunging energy prices (Oil, Coal and LNG) are expected to revive the
sector’s margins and profitability down the road.
With a lower-for-long oil price scenario significantly denting earnings of Oil and Gas
exploration companies coupled with rising risks of delinquencies for the Banking
Sector (despite State Bank of Pakistan’s relaxation), we feel local investors are finding
value-proposition in the Cement sector to out-perform the benchmark.
Notwithstanding the short term market volatility, the medium term prospects appear
to be improving for the sector after the new package for the construction industry.