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FBR conspiracy to undermine Imran Khan’s Housing Policy?

FBR's unwise proposals to amend the Capital Gains Tax Regime in Finance Bill 2021-22 threaten to erode the market confidence of construction sector, and ex-patriate remittances, that has been driving the recent robust performance of the economy. But such is the insensitivity of Ministry of Finance and babus of FBR that all protests by the representatives of the sector are falling on deaf ears. Many see this as a conspiracy against the robust growth vision of PM Imran Khan.

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Is there a FBR conspiracy against Prime Minister Imran Khan’s vision of robust growth? Pakistani economy’s recent robust performance that led to around 4% growth rate is mostly due to the construction boom in real estate sector. This become abundantly clear when one looks at the increase in sales of cement, steel, bricks and construction material – and the expatriate remittances that are mostly going into the real estate sector. But it appears that some one inside Federal Board of Revenue (FBR) has decided to bring an end to this market confidence. Many inside the sector fear that this may be a conspiracy by FBR to undermine the vision of PM.

Why this appears as conspiracy by FBR? because these amendments in Sec. 37 and Sec. 203 of Income Tax Ordinance threaten the market confidence. If approved in the budget these amendments will ensure that “Capital Gains” will be added up and become part of regular annual income subjecting these gains to highest income tax slabs (30-35%) instead of the 5-15% range currently in practice.

This apparent FBR conspiracy against the construction sector will multiply the tax burden of the investors to six or seven times. It is possible that some over zealous babu inside FBR thinks that with such measures tax targets can be achieved. Shaukat Tareen had also hinted, while talking of IMF negotiations, that “there are non-tariff means” of raising revenues. So is this the strategy? But this is plainly a dumb move and will destroy the market’s nascent confidence.

Real Estate Sector protests being ignored by FBR & Ministry of Finance 

The real estate sector is naturally protesting against these proposed amendments (Sec. 37 and Sec. 203) in the Capital Gains Tax regime, in the new Finance Bill 2021-22 presented on 11th June. Representatives of industry, like Ahsan Malik of the Real Estate Consultants Association (RECA) have appeared in tv programs (Geo, Hum, Waqt, 92 News, ARY, Dunya and others) and industry has placed advertisements in major national newspapers.

Why the impression of a FBR conspiracy deepens? because so far all of these protests have fallen on deaf ears. No one is prepared to discuss the implications. Most politicians of treasury and the opposition benches are not experts of tax, even cabinet members who were part of discussions on tv programs did not understand the full implications of these proposed amendments. And FBR and Ministry of Finance appear to be deliberately acting as deaf and dumb because representative of the industry are from middle class and lack the kind of influence large industry manufactures and textile exporters enjoy in Islamabad.

But to anyone who understands the dynamics of the real estate sector it is abundantly clear that if approved as part of the budget these FBR proposed amendments, in Sec. 37 and Sec. 203, will destroy the confidence of thousands of middle class people involved in the construction sector and will bring it to a grinding halt the way wrong steps by ex-Finance Minister, Ishaq Dar did in 2016. Many wonder if this is an elite conspiracy hatched inside FBR to destroy the prospects of the Housing market upon which PM Imran Khan relies for economic recovery.

How Real Estate Sector is behind the 4% Economic Growth?

Real estate or the construction sector of the economy is not an isolated sector, but it is linked directly to around forty different sectors of the economy. This is evident from the fact that the sale of steel, cement, bricks, tiles, plastics, furniture, wood works, electrical cables and plumbing gadgets has grown geometrically over the fiscal year 2020-21.

Cement was among the top five best performing sectors of the economy in the outgoing fiscal year. According to the economic survey, the “Cement industry has posted the highest ever Y-o-Y growth of 44.6 percent in March FY. 2021 due to massive increase in domestic consumption as well as exports. Total cement dispatches stood at 5.381 mt as against 3.719 mt last year.

Domestic consumption, of cement, grew by 42 percent to 4.563 mt as compared to 3.213 mt in March FY2020. The export trend represented a substantial growth of 61.6 percent to 0.818 mt dispatches in March FY2021 as compared to 0.506 mt during last year. Similar is the situation with steel.

But this is not all. Labor markets of unskilled workers, masons, plumbers, electricians, carpenters, among others is dependent upon the housing and construction. Sales of plots and housing units is happening across the country. This is visible all around Rawalpindi and Islamabad.

Only in Bahria Enclave more than 2000 housing units were fully completed over the last 18 months and more than 700 units are under construction. This is fuelling a property market in which banks are about to enter with housing finance and mortgage solutions. Currently banks are offering finance at Kibor plus 3% but with expansion of the market this may come down.

Skilled and high tech labor like that of architects, civil engineers, designers, draftsmen, overseers is also linked with the construction industry. This is providing employment to countless thousands actors the country. Due to this very reason, the incumbent government had incentivised the sector in 2020, and the cement and steel sales went up by 70 per cent.

Read More: Budget 2021 and the whines of fading hopes

Amnesty Scheme vs Relaxed Capital Gains Regime? 

Most commentators have misunderstood the ongoing construction boom and attributed this rush to the “Amnesty Scheme” but most construction of 5, 8 and 10 marla houses is by small middle class families as end users and entrepreneurs and is the result of a relaxed tax regime in “Capital Gains” which is also encouraging increased transparency and documentation of the construction sector.

Currently under the regime (2020-21) Capital Gains, within the first year, of less than Rs. 5 million are taxed at 2.5%, above Rs. 5 million but less than 10 million are taxed at 5%, above 10 million but below 15 million are taxed at 7.5% and above 15 million are taxed at 10%. Capital Gains are always taxed separately on the sale of particular assets as an individual item and are not added to the regular income. This is the norm world wide but some one within FBR wants to violate a norm for some narrow misguided interest.

The real estate industry is wondering if it is shortsightedness on the part of ‘babus’ in the FBR, or it is a conspiracy against Prime Minister Imran Khan’s plans to use the housing sector for economic growth of Pakistan.

Read More: Standing committee rejects many proposals in the new finance bill 2021-22

The advertisements given by RECA call for the constitution of a Real Estate Regulation Authority (RERA) in Pakistan to look over such issues that keep on recurring because of the ignorance and insensitivity of bureaucrats in Ministry of Finance and tax machinery of FBR. RECA has also written to the Senate’s Standing Committee on Finance and Revenue.

Read More: How Pakistan’s new budget fails to address key areas of concern

Pakistan: Lack of Credibility of the Decision Makers 

In a recent article, Gen.(r) Asad Durrrani, Ex-DG ISI, had lamented cynically that Pakistan is an incredible country not because of incredible things but it lacks total credibility. Amendments proposed, by the FBR babus, in the Finance Bill, 2021-22 fit this description. These proposals are clearly contrary to the speeches, goals and promises spelled out by the prime minister over the last three years. Even the new Finance Minister Shaukat Tarin has said on every platform that his plan for the upcoming fiscal year is to stimulate growth. Now FBR proposals make a fun of all these commitments.Many people, in the sector, are questioning that how such a stupid proposal did not cross the otherwise strict review of the standing committees that are reviewing the finance bill – or that is a joke too.

There can be only two logical reasons behind such a FBR proposal. Either some shortsighted ‘babu’ at FBR designed this change of “Capital Tax Regime” in order to meet the revenue collection target for the upcoming fiscal year 2021-22, or it is an attempt at slowing the growth of the real estate sector to bring down inflation in the country or to divert capital flow to another sector of the economy, like the manufacturing sector or stock markets.

Read More: Did PTI present a pro-people budget?

Researched by Hassaan Haq with additional input by the Editorial Desk. 

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