As we all know, the government of Pakistan announced a relief package for the construction sector on the 3rd of April 2020. This relief package was for both the private sector as well as the public sector. As the public sector is not our scope or our expertise, we won't be discussing that in this article today. The private sector consists of both commercial and residential construction. As these are our expertise, we will be discussing what impact this relief package will have on residential and commercial construction. The relief package is very comprehensive and detailed, but we will try to briefly explain the impact of the relief package in 4 simple points for a layman to understand and comprehend easily.
Amnesty Scheme
The government of Pakistan has announced an amnesty scheme for construction. That means until June 2022, whatever money you invest in construction — whether for residential purpose, rental purpose or any other purpose — there will be no questions asked from anyone on how the money was earned and invested. For instance, before this scheme, if a person wanted to build a commercial building they would have had to show proof of income, or that they had paid tax on that income. But after this scheme, if a person wants to build a 5 Marla home or a 20 Marla high rise building, there will be no questions asked of them. So this is a golden opportunity for everyone who wants to construct something. This is the golden time.
Reduction in Sales Tax and Excise Duties
These reductions will benefit everyone. People planning to build their houses or commercial buildings should avail this golden opportunity. Sales tax on construction material was 4.5% before these reductions, and now the government of Pakistan has decided to reduce it. The effect of these reductions will be very positive on the construction sector, as prices may drop on construction material, resulting in less costly construction. Apart from that, the GST on construction material — ranging from 8% to 16% — is also being reduced by the government. Not just reduced — they have decided to totally waive it off for some material. This will help immensely with construction cost. It is, however, too early to say how much difference it will make, as the policy has not yet been released on paper. As soon as the policy is out in black and white and the prices of material drop, it will be a lot clearer. We are looking forward to the changes and will write an article — and also make a video — on the changes in the prices and cost of construction.
Sales Tax on Service Charges
If someone wanted their house built by a registered company, they would have to pay 7.5% tax according to provincial law. For example, if you had a contract of Rs 10 million with a construction company, they were bound to pay 7.5% tax to their provincial government. Similarly, if the company's scale is big and they operate over Rs 50 million, they used to fall under the federal GST category and had to pay federal government taxes from 8% to 16% on their services. In other words, if you wanted one of these companies to build your house, they would have had to pay 7.5% to their provincial government and 8% to 16% to the federal government. In this relief package, the government of Pakistan has waived these taxes off to boost the construction industry. With these taxes waived off, it will be easier for everyone to get their construction done by proper professional companies. One of the main reasons our "thekedari nizam" was so entrenched was that these companies were charging too much because of their taxes — and in the end people weren't getting value for their money from the thekedari nizam. The good thing about this relief package is that now we can all get our construction done by these professional companies and also get the quality we require.
Fixed Taxes
The government of Pakistan has made taxes on construction fixed. That means if you get your house or anything constructed, the company will have to pay Rs 50/sq ft as tax to the government. For instance, if your house is 1000 sq ft, the construction company will have to pay Rs 50,000/- as tax. Even if the construction company asks the client to bear the load, it is easily manageable. It is too early to say the impact of these taxes will be exactly Rs 50/- at this time — it may be more or less than that.
In the end, the relief package will help boost the construction industry. Anyone who has the capital, or was planning for construction, this is the golden time to do so, as they won't be asked to pay taxes over their income.
Please be advised that we are no legal experts — we have tried to explain the relief package from the best of our knowledge to help people understand, we may be wrong. Please consult your legal advisers for a detailed policy breakdown.