The real estate sector is a major contributor to the Indian economy, supporting innumerable ancillary industries and providing employment to millions directly and indirectly. In the past couple of years, the realty industry has witnessed multiple internal, restructuring policies, and events such as demonetization, GST, and RERA, which are aimed at bringing transparency and accountability in the system.
To add to the repercussions of these policies in the short-term, the industry has been encircled with external risks such as the NBFC crisis, non-performing assets, etc.
While some measures have been initiated in the recent past, a lot more is required in order to revive the industry, which is currently undergoing a bearish phase for a considerable period of time.
In the upcoming budget, the industry has a lot on their wish list, some of them are as follows:
With the ongoing changes in the tax regimes, the industry has been stripped off many tax benefits and exemptions. With GST, stamp duty, income tax, and capital gains tax, investing in real estate is not considered as a friendly option anymore. Therefore, an income tax rebate could be provided for new home buyers. It can be done through by increasing the standard deduction for new home buyers. This would lead to increased sales, which would indirectly compensate for any loss to the exchequer by way of GST as well increased tax implication on vendors and ancillary industries.
For under-construction projects, the current effective rate of GST is at 12 percent, with the input tax credit, in addition to which the buyer has to register the property by paying stamp duty, which differs from state to state, lying in the range of 5 percent - 8 percent. Such high taxation is unfavourable for property transactions. The GST should be reduced to 5 percent, with the input tax credit for mid-income projects and nil for affordable housing schemes. This will help revive the industry substantially.
Also, the stamp duty could be subsumed in GST. The current double taxation accounts for up to 20 percent of the property value as the tax in case of under-construction projects.
In order for the government to achieve their objective of ‘Housing for all by 2022’ under 80C, the limit for principal repayment should be increased from the current Rs 1.5 lakh, especially for affordable housing or such principal repayments should be a separate limit outside Sec 80C.
Housing loan interest paid under section 24(b) as per the Budget 2017, capped the set-off of house property loss against any other income at Rs 2 lakh in a financial year. This is unfair for taxpayers who may already be facing financial struggles in building a single home. It allows higher tax benefit to those taxpayers who are building their house (with a home loan) for renting out in comparison to those who are building it (with a home loan) for their own residence. The section should be amended accordingly to fill the gaps, thus removing the capped limit.
The industry witnessed an NBFC crisis and many banks already listed under PCA led to illiquidity for developers in raising funds for their projects, thereby increasing the financing cost. The government should undertake reforms to provide an industry status to real estate. This will reduce the cost of financing and increase the efficiency in delivery timelines.
The industry is gearing up for paper ownership of properties in the form of REITs. The action of the developer to lease out unsold premises would tantamount, under the amended income tax Act, to a change in the character of the ‘inventory’ to ‘capital asset’ leading to being taxed at fair value. The following could have adverse effects, if not reformed as builders typically lease out properties either in the absence of buyers or to fetch a better price at a later stage as large investors and funds betting on commercial real estate prefer rent-generating properties.
The industry will also benefit if the tax on unsold properties is done away with. Though the developer has a moratorium period post completion certificate, but given the current sales cycle inventories are lying dormant with the developer and adding more pressure to sell.
Moreover, income tax payable on buying/selling of immovable property below the reckoner value falls under Section 50C, 43CA and 56(2)(vii) leading to double taxation on the difference in stamp duty value and transfer price. In the current industry cycle where the inventory is not moving and reckoner levels increasing unjustifiably, sales tend to happen at lower levels. There is a requirement of leniency from this aspect, in order to provide liquidity and give a push to sales of such assets.
With the current government’s focus on e-governance, there is a definite requirement of ease-of-doing business in the real estate. Therefore, a single window clearance is a must for the industry to reduce their cycle period.
In light of the Indian economy, the industry hopes that these recommendations are incorporated in the Budget 2019 to have a positive impact of economic reforms, continue ease of doing business, and ease of living.
Suresh Castellino is the executive national director of Capital Markets and Investment Services at Colliers International India.
First Published: Jan 28, 2019 8:14 AM IST