The housing industry is once again in trouble. The government says the industry itself is responsible for its woes, but builders insist the government also has a hand in it.

The federal budget for FY18 has withdrawn a special tax regime introduced for this industry in FY17 that yielded a mere Rs112 million, or below 1.5pc, of the target of Rs8 billion. Finance Minister Ishaq Dar regretted this poor performance while announcing the withdrawal in his budget speech.

Builders believe this withdrawal coupled with two other budgetary measures—higher rate of federal excise duty (FED) on cement and additional sales tax on steel—will push up the cost of construction. And, they have already started lobbying to convince the government to review its decision. But the government has, so far, shown no signs of budging.

Under the special tax regime, a fixed per square foot tax was imposed on commercial and residential buildings and builders were asked to deposit the tax at offices of the Federal Board of Revenue (FBR) through representatives of the Association of Builders and Developers (ABAD).

The federal budget has withdrawn a special tax regime. Builders believe this withdrawal, coupled with two other budgetary measures, will push up the cost of construction

For the government, the fact that the new tax scheme yielded only Rs112m against Rs2.6bn actual collection under old taxation a year earlier was enough to scrap it. But ABAD officials question this approach on two grounds.

One, a new tax regime developed with the consensus of stakeholders should ideally not be scrapped if the tax collection target is not met in a year. And, second, the government must also investigate the circumstances that led to such a low tax collection.

ABAD officials say the FBR officials themselves let the scheme fall apart for it had blocked avenues of corruption. And they demand that the new tax scheme be given at least two more years to succeed.

The government says that the new scheme was introduced for boosting tax collection from the construction industry (which at Rs2.6bn a year was already too low) and for proper documentation of the construction sector. Since the new scheme failed to achieve both objectives, continuing with it makes no sense.

“Indications are that builders will have to digest the withdrawal of the special tax regime and their protests will soon be over,” says a former chairman of ABAD referring to endorsement of the withdrawal decision by the Senate Committee on Finance and Revenue.

“But the move to increase FED on cement from Re1 per kg to Rs1.25 per kg and the increase on sales tax on steel (which is charged through the units of electricity consumed by steel manufacturers) from Rs9 per unit to Rs10.5 per unit will definitely make housing pricier.

“When the price of a 50kg cement bag goes up by Rs12.50 (in case cement makers just pass on the impact of higher FED without adding anything), it is enough for builders to charge a lot more from those who’ve booked apartments or villas.

“And when it comes along with a substantial rise in steel prices (which is a certainty following higher sales tax on steel), they’d literally make arbitrary increases. I’m speaking from experience.”

Analysts say any increase in construction material prices and anticipated rise in the cost of construction also leads to an increase in house rents.

House rents have already moved up in Karachi, Lahore, Islamabad and other major cities in the recent past due partly to urbanisation and expansion in economic activity there.

But online house renting portals and other commercial web platforms updating housing prices and rents on an hourly basis have created intense competition in the renting business and given people a chance to strike the right deals after thorough searching. “So, I don’t think house rents will rise on mere anticipation (of higher cost of construction),” an official of Zameen.com told this writer.

The construction industry, in general, is estimated to have grown 9pc in FY17, far less than 14.6pc in FY16 but more than double the five-year average of 4pc. Prospects for FY18 are also bright on the back of high economic growth and speedy progress on CPEC-related infrastructure projects.

“But construction of housing units in the next fiscal year may show some dampening in sentiment,” fears a leading builder citing the anticipated increase in the cost of construction due to budgetary measures. There is an estimated backlog of more than a million housing units in the country and every year demand for additional 250,000-300,000 housing units keep coming up.

An increase in the cost of housing for the poor and middle-income group would have a negative impact on builders catering to housing needs of such people. Instead of launching housing projects for less privileged individuals under the Prime Minister’s Scheme which is often meant for gaining political mileage, there is a need to keep the cost of housing low on a sustainable basis, bankers involved in housing finance say.

Builders say that the real estate valuation system, which has been reformed with the right intention of documenting this sector, needs some simplification adding that the current system of three-tier valuation of property can at least be regrouped into two: residential and commercial.

Currently properties not falling into A or B residential category are treated differently for valuation which opens up room for corruption.

They, however, appreciate the provincial governments’ move to digitalise records of lands. KP and Punjab have partially done this and Sindh and Balochistan governments are also moving in this direction.

Once land records are digitalised, obtaining formal finance for housing would become easier and at least one source of inflating the cost of construction (informal, group or crowd financing) would cease to exist.

Published in Dawn, The Business and Finance Weekly, June 5th, 2017