Why the Association of Builders and Developers (ABAD) of Pakistan Opposes the 3% FED ?
December 27, 2024
Pakistan’s construction and real estate sector adds over 2.5% to our national GDP. This industry provides employment to millions of workers through direct and indirect means. A new 3% Federal Excise Duty now threatens to destabilize this significant economic foundation.
The Association of Builders and Developers of Pakistan (ABAD) strongly opposes this additional tax burden. This new FED will harm property developers and affect 72 allied industries. International investors might also reconsider their investment decisions.
Our detailed analysis will get into ABAD’s opposition to the 3% FED. We will explore the economic risks and suggest better alternatives to support Pakistan’s real estate sector and overall economy. The analysis will also evaluate how this decision could affect our competitive position against neighboring markets like Dubai.
1. Understanding the Current Real Estate Tax Structure
The Association of Builders and Developers of Pakistan (ABAD) has noticed revolutionary changes in Pakistan’s real estate tax structure these past few months. Here’s our analysis of the framework that shapes our industry today.
Breakdown of existing property taxes
Our real estate sector deals with several tax obligations:
- Capital Value Tax (CVT): Fixed at 2% of property value
- Withholding Tax: Ranges from 3% to 20% based on filer status and property value
- Capital Gains Tax (CGT): 15% for filers and 15-45% for non-filers
Role of Federal Excise Duty in taxation
A new Federal Excise Duty adds another layer to our tax structure. Developers and builders must now collect:
- 3% duty on gross amount for active taxpayers
- 5% for late tax return filers
- 7% for non-filers
Current tax burden on developers
Developers and builders face an unprecedented tax burden. The FBR has established minimum taxable profits at specific rates:
- 10% of gross receipts for residential/commercial building construction
- 15% for development and sale of plots
- 12% for combined construction and development activities
These rates apply whatever the actual profitability might be. To cite an instance, see how we pay taxes right away on advance payments from customers. This creates major cash flow challenges for our members, particularly smaller developers.
This structure has created worrying trends. Pakistani investors from all over the world have invested about $11 billion to Dubai’s real estate market. They now rank as the second-largest group of foreign investors in UAE’s property sector. Our complex and heavy tax burden directly causes this capital flight.
2. Economic Impact of 3% FED
ABAD representatives like us are deeply worried about how the new 3% Federal Excise Duty will affect our economy. The construction sector shrank by 5.2% in real terms in 2023, and now faces challenges that could shake the entire economy.
Effects on construction industry growth
Our construction industry adds PKR 1,848 billion to Pakistan’s GDP and serves as a vital economic force. The situation looks grim as construction activities have slowed down. The new FED puts extra pressure on our struggling sector, where material costs have jumped by 38% year-over-year.
Impact on 72 allied industries
The construction sector’s influence reaches way beyond building sites. We provide support to 72 allied industries including:
- Primary materials: cement, steel, timber
- Finishing materials: tiles, glass, paints
- Support services: transportation, warehousing
- Manufacturing: cables, fixtures, fittings
These industries now operate nowhere near their full capacity. This threatens their survival and future growth. Local cement dispatches alone dropped by 2.17% in May 2024 compared to last year.
Potential job losses and economic slowdown
Our construction sector employs 7.6% of Pakistan’s total labor force. The new FED will likely lead to most important job losses throughout the industry. Past economic challenges showed that about 33% of workers in construction faced job disruptions.
The broader economic risks worry us the most. World Bank data shows that construction investments multiply income by more than five times the original investment. This additional tax burden could trigger a chain reaction that might severely hurt Pakistan’s economic recovery.
3. International Investment Concerns
ABAD’s concerns go beyond local markets. We see a worrying trend of money moving to neighboring countries, especially Dubai.
Competition with Dubai real estate market
Pakistani and Dubai real estate markets show stark differences that drive investors away. Dubai attracts investors because it offers:
- Tax-free property ownership
- High rental yields (up to 8% annually)
- Well-regulated market structure
- 10-year residence visa options for investors
Effect on overseas Pakistani investments
The current tax structure creates problems for overseas Pakistanis. Non-filers pay more than 45% in taxes. This pushes them to look at other markets. Pakistani investors became Dubai’s 3rd largest real estate investors in early 2022.
Capital outflow risks
Money leaving Pakistan creates serious problems. Large amounts of investment capital now flow from Pakistan to markets like Dubai. This trend worries us because overseas Pakistanis who used to invest through programs like Roshan Digital Accounts now look elsewhere.
Dubai lets foreigners own property fully in certain areas. Pakistan’s strict rules limit these opportunities. ABAD continues to support banking sector changes to make construction a priority. This could help keep investment money in Pakistan.
Recent FBR tax breaks for overseas Pakistanis with NICOP or POC cards help, but we need more detailed reforms. Property demand shows recovery signs in DHA, Bahria Town, and Lake City. These improvements might not last if we don’t deal with the real problems causing money to leave the country.
4. ABAD's Alternative Proposals
ABAD has developed detailed alternative proposals to address current challenges in Pakistan’s real estate sector. These proposals aim to boost growth and ensure the government’s revenue stays stable.
Recommended tax structure changes
We suggest replacing the current 3% FED with a balanced approach. A 1% withholding tax on property transactions under Section 236K would work better. This change would help solve Pakistan’s housing shortage of 12 million units and maintain steady government revenue.
Proposed incentives for first-time buyers
Our recommendations to make homeownership more available:
- Complete tax exemptions for first-time apartments and homebuyers
- Tax-free property purchases for overseas Pakistanis to attract foreign investment
- Special incentives for green development projects with up to 10% tax rebates
Mortgage financing suggestions
We’ve created new financing solutions that tackle affordability issues. Our plan suggests a 10-year fixed-rate mortgage product linked to Pakistan Investment Bonds (PIBs). Buyers would need only a 15-20% down payment, making homes more affordable for average Pakistanis.
Better foreclosure laws would support these financing initiatives. Banks should focus more on construction sector financing. Pakistan’s mortgage-to-GDP ratio stands lowest in South Asia at 0.25%. India and Sri Lanka lead with 11% and 8% respectively.
These proposals could revolutionize Pakistan’s real estate sector and solve the housing shortage. We suggest a 50% reduction in property tax for affordable housing units valued between PKR 2.5-8 million. This change would create a more inclusive housing market.
5. Conclusion
Pakistan’s real estate sector faces a defining moment. The 3% Federal Excise Duty poses a serious threat to our construction industry and affects millions of workers in 72 related sectors. Our studies reveal that investors might move their money to Dubai, where Pakistanis already buy properties extensively.
ABAD has come up with practical solutions that work for both the government and the industry. We suggest a straightforward 1% withholding tax, benefits for first-time homebuyers, and better home loan options. These changes would help solve Pakistan’s housing problems and provide steady tax income.
Property development creates five times more value than the original investment and propels economic growth. Pakistan needs well-balanced reforms that attract investors while collecting fair taxes instead of risking growth with heavy taxation. Our suggestions prove that smart policy changes can protect both the government’s interests, allied industries and housing growth.
FAQs
The 3% Federal Excise Duty (FED) is a new tax on real estate transactions in Pakistan. ABAD opposes it because it adds to the already heavy tax burden on developers and could negatively impact the construction industry, allied sectors, and overall economic growth.
The 3% FED could slow down construction activities, potentially leading to job losses in the sector and its 72 allied industries. It may also discourage investment and trigger a broader economic slowdown due to the construction industry’s significant multiplier effect on the economy.
ABAD suggests replacing the 3% FED with a 1% withholding tax on property transactions. They also propose tax exemptions for first-time homebuyers, incentives for sustainable development projects, and improved mortgage financing options to stimulate growth in the real estate sector.
Pakistan’s real estate tax structure is more complex and burdensome compared to countries like Dubai, which offers tax-free property ownership. This disparity is causing capital outflow as investors, including overseas Pakistanis, are also increasingly attracted to more favorable markets.
The 3% FED could further discourage international investment in Pakistan’s real estate market, particularly from overseas Pakistanis. It may exacerbate the existing trend of capital outflow to markets like Dubai, where Pakistani investors are already among the top foreign property buyers.