After Real Estate Regulatory Authority (RERA), demonetisation and Goods and Services Tax (GST), majority of the stakeholders were of the view that real estate sector would finally settle down in 2018 and the sector will beat the lull.
In fact, in the first three-quarters of the FY18, supply-side stakeholders successfully built the narrative that the worst is over and the sector has started improving, especially the housing segment.
Real estate sector has been undergoing massive stress due to the ongoing liquidity crisis with the non-banking financial companies (NBFCs). Funds have dried up and project execution and delivery are getting impacted. The government has clearly indicated its intent to improve the housing demand and provide impetus to this sector.
Usually, developers raise funds through private equity players, banks and NBFCs. Due to the delay/defaults, banks have also become little reluctant and cautious in lending to the sector.
This brings us to the first expectation that the real estate industry has from this time’s budget, “resolution of the NBFC crisis”. The NBFC market share in developer financing had increased from 24 percent at FY14 end to 53 percent as of March 2018 and this had come down drastically post the Infrastructure Leasing & Financial Services (IL&FS) crisis.
The second expectation is that there should be some relaxation with respect to input tax credit denial on the sale of residential properties. Currently, companies have to pay 5 percent GST on sale of properties and 1 percent on affordable housing but cannot avail input tax credit on the same.
Some of the other expectations that the industry was the tax rationalisation by subsuming stamp duty in GST, extending the input tax credit to the commercial segment, and providing industry status to the industry.
From the buyers’ perspective, there is an immediate need for a stressed fund with respect to all the stressed projects they have invested in.
The interim budget did provide some sops to the industry and the buyers, but considering how important this sector is for the economic growth and fixed capital formation, more reforms are a need of the hour.
Budget announcements in the interim budget: Budget announcement: Extension of tax benefits for developers for affordable housing u/s 80-IBA is extended for one more year i.e. the housing projects approved till March 2020. Implications: Developers will look at launching more affordable housing projects to get an additional extension. These projects are taxable under MAT if they are launched through SPV. Budget announcement: Extension of period of exemption from levy of tax on notional rent, on unsold inventories, from one year to two years, from the end of the year in which the project is completed. Implications: Till now, a developer would require to pay a tax on the notional rent on an unsold apartment in case that apartment remains unsold even after 12 months in the financial year in which the Occupation Certificate for the project is received. A developer would have to pay 0.5-0.6 percent of the property value annually under this tax clause. Budget announcement: The benefit of rollover of capital gains under section 54 of the Income Tax Act will be increased from investment in one residential house to residential houses for a taxpayer having capital gains up to Rs 2 crore. This benefit can be availed once in a lifetime. Implications: Currently, income tax on notional rent is payable if one has more than one self-occupied house. The budget proposes to exempt levy of income tax on notional rent on a second self-occupied house. Budget announcement: Provides flexibility to a buyer of new apartments as he/she now has a choice to buy two houses with the capital gains instead of one (under current tax laws, the new properties have to be purchased within 3 years of selling the existing properties to avail exemption of capital gains tax. Implications: If an individual had more than one house, then apart from the self-occupied property, the second home was subject to income tax on notional rental income. This meant that even if the second house was lying vacant, an individual was required to pay tax on the notional rental income (calculated as per tax rules). This will now be done away with and provides marginal relief to homeowners