The reality of Indian realty is that the sector is grappling with a trinity of troubles including increasing input cost due to abolishment of input tax credit (ITC) and exorbitant development premiums, excruciating liquidity crisis owing to NBFC defaults and rising NPAs of banks, and piling up of unsold inventory because of weak consumer sentiment and high unemployment.
It is one of the worst phases for real estate as an asset class underperforming by leaps and bounds vis-à-vis others. Hence the wish list of the sector is long which was left ignored in the interim budget due to the government’s focus on populist budgetary measures ahead of election. We expect the following essential steps in the upcoming Union budget to revive the sector:
Corporate tax rate reduction: It is very important that the fiscal stimulus be given to revive the business environment by cutting down corporate tax amid shrinking operational margins of developers, lack of finance, hiked input-related GST and abolishment of ITC, cumbersome approval system and resulting cost run-up impacting operating margins, and a high tax rate and DDT resulting in poor PAT margins. Hence the need of the hour is to lower tax rates to 25 percent from 33 percent giving boost to realty players and increasing project viability which are long run with average tenure of 3-7 years whereby realty corporates have to endure huge uncertainties including market risk and policy risk. Lowering of GST on input side: The move to bring down GST from 12 percent to 5 percent overall and 8 percent to 1 percent for affordable segment was a welcome step as it helped buyers to move back close to tax incidence of service tax regime. However, the input cost materials like cement stood at exorbitant GST rates of 28 percent which ideally should be brought down to 18 percent enabling developers to reduce cost of construction as overall ITC has been abolished. Slum Rehabilitation Authority (SRA): GST on rehab and project affected people (PAP) units should be allowed ITC: Since the government has a vision of ‘Housing for All’ by 2022 which includes the contribution of SRA scheme to greater extent in MMR region. The government should allow ITC related to cost incurred in construction of rehab and PAP units which has a high tax incidence almost equivalent to sale construction hence huge implication on construction cost for the developers discouraging the rehabilitation scheme. Affordable housing for MMR to be redefined to Rs 45 lakh: The government should revisit the carpet criteria of 30 sq. mt. in metros and 60 sq. mt. in elsewhere under section 80-IBA and should bring all categories of affordable housing meant for EWS, LIG, MIG-I and MIG-II under its purview, which permits 100 percent deduction in respect of the profits earned from affordable housing projects. This will ensure wider project coverage and encourage more developers to avail the benefits of the income tax deduction. This is imperative to achieve the target of ‘Housing for All’ by 2022. Inclusion of stamp duty in GST: It is important that the government includes stamp duty under the purview of GST to boost the demand for housing thus enabling absorption of high unsold inventory across metros. Single window clearances: The cumbersome approval system across different regulatory bodies for development causes delay and does impact the financial feasibility of the projects which is discouraging for developers given they are already time bound by RERA to deliver, failing which huge cost penalties are impending apart from thinning margins. Therefore, the government should streamline departments for approvals and clearances in a time-bound manner. The move will avoid delays caused by external factors and buyers will get the possession on time. Industry status to real estate: The NBFC fiasco and overall credit crunch of banking system had a domino effect on viability of real estate with access to construction finance largely paused and exorbitant rates of borrowing making project viabilities questionable. Hence it is imperative for the government to grant industry status to the entire real estate sector to facilitate the realty developer in raising capital at lower cost. Curbing angel tax to boost start-ups: Currently angel funding is considered as income and is taxed at a full income tax rate of 30 percent. The government should curb or altogether abolish angel tax in the upcoming budget 2019-20 as it would enable the co-working firms to lease more spaces for start-ups and entrepreneurs. Angel tax is destroying the fostering of start-up business, and indirectly co-working firms would pull away from leasing co-work spaces.
Parth Mehta is the Managing Director of Paradigm Realty.