The real estate industry has been facing some rough weather given the tough demand environment, which got aggravated with the recent NBFC crisis. While the industry undertakes measures to revive demand, a much-needed impetus from the Union Budget will go a long way in helping turnaround its fortunes. Here are a few recommendations we believe will help the cause of real estate in general and housing demand in particular.
Real estate is one of the major contributors to the economy supporting various ancillary industries and providing employment to millions directly and indirectly. Real estate growth has a multiplier effect, but despite such strong fundamentals the government does not recognise it as an industry.It is time that real estate gets industry status. This will enable developers to raise funds at lower rates and reduce cost of capital which would eventually have a bearing on overall cost.
50 per cent abatement for land
The single-tax regime in India ushered in additional cost pressures on real estate. Presently, real estate falls under the 18 per cent tax bracket with one-third abatement for land taking the effective tax rate to 12 per cent. However, in major metros, the share of land is more than 50 per cent of the project cost. We therefore recommend that the government aligns this with market realities and accordingly increase the abatement for land to 50 per cent thereby bringing down the effective tax rate to 9 per cent.
‘Housing for all by 2022’ is one of the pet projects of the government and it wants to deliver 10 million houses under this program. Out of 10 million, 95 per cent are to be constructed for Economically Weaker Sections (EWS) and Low-Income Groups (LIG). As the affordability of this segment and the house value is low, the impact of the slightest upward cost pressure is magnified and becomes a deal breaker. The current GST rate of 12 per cent coupled with one-third abatement for land, making it an effective GST of 8 per cent, is adding huge upwards pressure on overall costs. We recommend lowering of GST for affordable housing projects to an effective 6 per cent by enhancing the abatement for land to 50 per cent.
Income Tax deductions
In the Indian context, the ownership of a house is a lifetime goal. At present, Section 80 C of the Income Tax Act does not give a singular focus on housing because of numerous competing investment alternatives. To augment house purchase decisions and provide some fillip to real estate sales, it is suggested to carve out a separate annual deduction of `1,50,000 for principal repayment.
Currently, in the later years of the home loan tenure, while the buyer is still paying a significant component of his income in the form of principal, he isn’t getting any tax benefit as the interest component in that period is insignificant. To address this dilemma, a separate deduction of `1,50,000 for principal repayment on housing loans will help the cause of house purchase for the entire loan tenure that extends to as many as 20 years.
Real Estate Investment Trust
Despite regulatory approvals being in place for quite some time, REITs, a potent instrument of change in the real estate industry, have been held back. REITs have the potential to enhance the supply of commercial real estate — an enabler for the employment ecosystem. For unit holders, long-term capital gains holding period for REIT units should be brought down from three to one year (at par with equity investments). This shall make REITs more attractive for investors.
(Views expressed are personal)
Chairman & Managing Director,
Knight Frank India