Budget 2020 Expectations for Real Estate: Over the decades, the real estate industry has been a silent growth engine for the economy. This is no surprise when one considers that the sector has upstream and downstream linkages with 250-plus verticals in India. But economic headwinds during the past decade have severely cramped buying interest from end-users as well as investors. As a result, there have been serious ramifications on the economic and employment prospects across India’s landscape.
For instance, realty accounts for 8% of the GDP while being the second-largest jobs provider after agriculture. Since Independence, real estate has helped people enjoy a better quality of life, thanks to its broad employment and entrepreneurial potential that has benefitted all sections of society. In the past few years, however, apart from the economic downturn, the industry has had to weather institutional changes and challenges such as RERA, GST and IBC.
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There’s no doubt these reforms are laudable for their role in ushering professionalism, transparency and accountability among varied industry players, thereby safeguarding the customer’s interests. But these have extracted steep compliance costs from both big and small developers, which in turn has put the pressure of higher costs on customers. In addition, as India’s GDP growth has fallen from 8% to under 5%, it has adversely affected the housing and commercial demand in the sector. This has come about because buying homes, offices, shops, plots or other realty offerings are part of discretionary spends by households. Therefore, the moment GDP comes down and employee salaries dip, there is a concomitant drop in the purchasing power of end-users and investors.
Considering this scenario, it is critical the upcoming Union Budget announces some meaningful tax reforms and incentives that rekindle demand in the sector in the interests of all stakeholders. In fact, some direct measures are required for reviving real estate as part of the Centre’s overarching objective of boosting economic activity and GDP growth.
Of course, there is no doubt the government has already announced relief measures such as a crucial change in an anomalous IBC (Insolvency and Bankruptcy Code) clause, which allowed even a single unhappy buyer or disgruntled investor to initiate insolvency proceedings against developers. The setting up of a stress fund to facilitate the completion of eligible projects has been another crucial initiative that could slowly spur a real estate turnaround.
Taking these factors into account, the upcoming Union Budget 2020-21 can serve as the perfect opportunity for the Centre to announce a slew of measures encouraging private sector investments, particularly in affordable housing, in sync with the government’s mission of ‘Housing for All by 2022’.
To begin with, relief can be offered at the bottom of the pyramid in the case of income tax and other levies and norms. To elaborate:
A. Income Tax
1. Deduction of interest on Home Loans
An individual is allowed to avail of deduction of interest on the loan for acquiring a house. But the deduction is allowed only on loans sanctioned between 01 April 2016 and 31 March 2017 and if the amount is not exceeding Rs 50,000.
To boost demand for rental housing and make the deduction meaningful, it is necessary to initiate the following amendments.
# Extend the timeline for the loan to 31 March 2022 in line with ‘Housing for All by 2022’.
# For individuals, 100% interest on home loan should be allowed as deduction for the first home.
# For the second and third homes, 100% interest on home loans should be allowed as deduction provided that – barring self-occupied homes – the others are rented for nine months during the year.
Watch: Budget 2020: Your income tax burden may come down – Top 5 Expectations
2. Section 43CA
Section 43CA of the Income Tax Act is a barrier to natural price correction since it only considers the full value of a property even if the same is sold at less than the circle rate. In such cases, the seller or builder has to compute his/her taxable business income as per the deemed value rather than the actual sale consideration. In a stalled project, this has a cascading impact on homebuyers, banks and other stakeholders. Given these disadvantages and the anomaly, Sec 43CA needs to be removed or amended to exempt primary sales or at least allow sale at 30% below circle rate.
3. Section 80-IBA
a) The following part of Section 80-IBA should be deleted: ‘Where the approval in respect of a housing project is obtained more than once, the project shall be deemed to have been approved on the date on which the building plan of such housing was first approved by the Competent Authority.’
Again, this is another clause that ignores ground realities, especially in a stagnant market. There should be an exception to this clause to benefit cases where the construction work has not begun after the plan sanction and the developer opts for re-sanction to undertake affordable housing. One needs to appreciate that projects already in an advanced stage have better prospects of being converted into an affordable housing project with predetermined timelines rather than a green-field one that may not be in a position to deliver within tight time constraints.
b) The benefit u/s 80-IBA should be extended to all affordable housing projects as long as the size of the residential units satisfy the limits on carpet area of the units at 30 square metres, if the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or 60 square metres if located in any other place.
B. GST
a) The benefit of ITC (input tax credit) should be restored for real estate GST by charging GST at 12% with allowance for land cost at 33% on par with the current rate of works contract services for Government projects.
b) Taking into account the output GST being paid on such rentals for commercial leases, the restriction on ITC eligibility u/s 17(5)(c) and 17(5)(d) of the CGST Act should be removed.
Furthermore, there have been news reports about GST rates being raised to compensate for revenue shortfalls. Given that real estate acts as a silent growth engine of the economy, an increase in GST rates will only dampen investment and market sentiment while effectively leading to even lower tax collections.
C. Definition of Affordable Housing
As per present provisions, the definition of affordable housing comprises:
# Residential units of 30 square metres carpet area in metro cities
# Residential units of 60 square metres carpet area in non-metros
Going by the aspirations of people today, the definition needs to be revised and made universally applicable across all Government agencies as: ‘Affordable housing comprises units with a carpet area as defined under RERA that do not exceed 60 square metres in the metros and 90 square metres in other regions.’
D. One-time Restructuring Scheme for Real Estate Projects
Liquidity shortage continues to cause great distress in real estate. Consequently, a one-time restructuring scheme with a moratorium or freeze on the principal amount and the interest of two years is immediately needed.
E. Easing Flow of Funds for Housing
Housing loans up to Rs 1 crore could be considered under the priority sector and interest rates kept below 7% effectively.
If the above measures are implemented in the forthcoming 2020-21 Union Budget, these can go a long way in reigniting positive investment sentiment in the real estate industry. The resulting upswing in allied sectors will then boost the overall market sentiment, leading to a faster turnaround in the Indian economy.
(By Satish Magar, President, CREDAI (National))
Source: Financial Express
