AIRLINK 61.60 Decreased By ▼ -0.88 (-1.41%)
BOP 5.35 Decreased By ▼ -0.01 (-0.19%)
CNERGY 4.48 Decreased By ▼ -0.10 (-2.18%)
DFML 15.35 Decreased By ▼ -0.15 (-0.97%)
DGKC 65.24 Decreased By ▼ -1.16 (-1.75%)
FCCL 17.23 Decreased By ▼ -0.36 (-2.05%)
FFBL 27.50 Decreased By ▼ -0.20 (-0.72%)
FFL 9.28 Increased By ▲ 0.01 (0.11%)
GGL 10.01 Decreased By ▼ -0.05 (-0.5%)
HBL 105.00 Decreased By ▼ -0.70 (-0.66%)
HUBC 121.44 Decreased By ▼ -0.86 (-0.7%)
HUMNL 6.50 Decreased By ▼ -0.10 (-1.52%)
KEL 4.43 Decreased By ▼ -0.07 (-1.56%)
KOSM 4.35 Decreased By ▼ -0.13 (-2.9%)
MLCF 35.44 Decreased By ▼ -0.76 (-2.1%)
OGDC 122.50 Decreased By ▼ -0.42 (-0.34%)
PAEL 22.79 Decreased By ▼ -0.21 (-0.91%)
PIAA 31.35 Increased By ▲ 2.01 (6.85%)
PIBTL 5.80 No Change ▼ 0.00 (0%)
PPL 107.00 Decreased By ▼ -0.50 (-0.47%)
PRL 27.20 Decreased By ▼ -0.05 (-0.18%)
PTC 17.95 Decreased By ▼ -0.12 (-0.66%)
SEARL 52.68 Decreased By ▼ -0.32 (-0.6%)
SNGP 62.62 Decreased By ▼ -0.59 (-0.93%)
SSGC 10.60 Decreased By ▼ -0.20 (-1.85%)
TELE 9.05 Decreased By ▼ -0.15 (-1.63%)
TPLP 11.42 Decreased By ▼ -0.02 (-0.17%)
TRG 70.20 Decreased By ▼ -0.66 (-0.93%)
UNITY 23.55 Decreased By ▼ -0.07 (-0.3%)
WTL 1.28 No Change ▼ 0.00 (0%)
BR100 6,913 Decreased By -30.9 (-0.45%)
BR30 22,661 Decreased By -166.2 (-0.73%)
KSE100 66,937 Decreased By -205.1 (-0.31%)
KSE30 22,030 Decreased By -59.5 (-0.27%)

Cement and steel that make up 40 percent of the total cost of construction material will both see an increase in prices after the budget announced last Friday. The federal budget allocated a FED of Rs.1/kg on a 50-kg cement bag that was previously five percent on the retail price. The current retail price of cement ranges between Rs480 to Rs530 per bag in the domestic market which is already significantly higher than cement prices in Iran, India or the UAE.

The FED ranged from Rs24 to Rs28 for five percent on retail price, but the change in rates would bump up the duty paid to Rs50 per bag and Rs1,000 per ton of cement. The industry would no doubt pass this price onto the consumers. Global coal prices have been falling and should bring down input costs for cement manufacturers but industry stakeholders claim that the price advantage is balanced out when the government-imposed duty on coal import of six percent is accounted for.

graph 29

When this import duty was first introduced, the government was encouraging the use of coal as alternative fuel owing to massive gas shortages but when the cement sector upgraded its plants from furnace oil to coal based power generation; an import duty of one percent was imposed, subsequently increased to six percent. A further increase in this duty might be on the cards. According to industry estimates, the combined impact of FED on cement and coal import duty is Rs32 per bag and may bump up the end-user prices to Rs565, from Rs530.

On the flip side, while the cement producers lament the increase in taxes, they have continually enjoyed protection from imports in the form of custom duties for years allowing them to charge premium prices in the local market whilst enjoying sky-rocket margins. Recording 42 percent in 9MFY16; 38 percent in FY15 for major firms, the cement cartel is no myth. Consequently, the burden of any increase in levies falls on the consumer.

For steel too, the new budget announced that the fixed sales tax would be revised upwards. Recall, that the government increased the regulatory duty (RD) on import of major steel items from 15 to 30 percent recently, in addition to a 5 percent customs duty that brings the duty up to 35 percent to restrict alleged steel dumping and protect local steel manufacturers. But essentially, this RD allows local manufacturers to fix prices at will.

Also, keeping in view that tax collection from Builders and Developers had remained paltry compared to the sectors accrued profits, the current budget has introduced a fixed tax on builders and developers on the basis of per unit area after an agreement with the Association of Builders and Developers (ABAD). This tax while considerably shore up revenues in the next fiscal, but still may not be as much as they should be. Tax collection would be much higher if the tax was charged on profits earned by the sector, likely to increase exponentially in the coming fiscal given sector outlook.

On the demand side, the sector is growing fast. It contributed 12.3 percent to the industrial sector; 2.6 percent to the GDP in the outgoing fiscal (against 2.4 percent in FY15) and 7.4 percent to the formal labour force according to the Economic Survey 2015-16. Massive infrastructure spending (Rs 188 billion budgeted for the construction of roads, highways and bridges with total PSDP spending budgeted to be Rs 800 billion), and a jump in housing and real estate activities, not to mention the upcoming construction demand driven by CPEC will scurry up sector growth further.

But with this construction boom, the picture-of restricting imports of steel and cement that ends in reduced price competition; increase in FED and sales tax on local suppliers; and new levies for builders-translates to an expansion in the cost of construction. And this combined cost will be borne by the consumer, who with the way things are ultimately get hits the hardest when it comes to government policies.

Prospective property buyers should tighten their purse strings in advance.

Comments

Comments are closed.