Union Budget 2019-20 should provide a REAL BOOST to Realty Sector

Union Budget 2019-20 should provide a REAL BOOST to Realty Sector
01/07/2019 , by , in EXPERT ZONE

Authored By: Jayesh Kariya, Vyomesh Pathak and JigarVora – Chartered Accountants   

The success of RERA in many States, recent incentives provided under GST regime for affordable housing projects, incentives under the Pradhan MantriAwasYojana Scheme and further relaxations in tax incentives for affordable housing projects have provided a much-needed thrust to India’s housing market. However, the sector has been ailing on account of sluggish demand, lack of adequate and quality funding and the web of multiple approvals delaying the project launch. The realty sector has significant potential to fuel the growth of the economy given that it is the second largest contributor to the economy after agriculture, the stakeholders in the realty sector are optimistic that the re-eleted NDA Government will bring our drastic changes both in policies as well as fiscal laws.

There are several reforms which hold the key to turnaround the realty sector in India. Here are the major reforms that the real estate stalwarts are looking forward to in the upcoming Union Budget 2019-20.

  • Affordable Housing development has been accorded “Infrastructure” status and it has helped the sector to certain extent. The sector is expecting “Industry” status as real estate development business is no less than other businesses which enjoy the industry status.
  • RERA, Land Titling Bill, Black Money Regime and many more have helped the sector. However, the web of approvals and the “tortoise” speed of approvals is creating huge bottlenecks both in terms of delivering the projects in time as well as facilitating funding for the project at an early stage. The Government should implement online “Single Window” platform for providing approvals that too based on self-declaration. This will help in speedy and transparent approval process.
  • Equity funding has dried out and debt funding is killing the developers. The Government should consider allowing developers accessing foreign debt funding through ECBs at a much lower interest cost. Further, the Government should permit allowing foreign investors investing in the really sector through Hybrid Instruments under the Foreign Direct Investment Policy itself.
  • Affordable housing is the next wave and the Government has taken few initiatives to foster this segment. However, there few challenges that this segment is facing should be addressed by appropriate changes in the tax laws. Some of them are as below:

 

  • The 100 percent tax exemption should be granted for projects especially large township projects which have already been approved on or before 1 June 2016;
  • The timeline for completion of such projects should be extended from 3 years to 5 years:
  • Exemption from levy of MAT should be provided for profits from affordable housing projects otherwise such projects would continue to attract at least 20% tax under MAT, which defeats the purpose of granting the tax incentive at first place;
  • The recent reduction in GST rate to 1% for affordable housing projects with units priced up to Rs 45 lakh and with a carpet area of up to 60 square meters in metros and 90 square meters in non-metro cities has benefits developments in non-metro cities, but has not benefited developments in metro cities, which the need of the hour is far higher. Hence, the expectation is that the said limit of Rs. 45 lacs per unit should be removed or increased to at least 75 lacs for metro cities.

The Finance Minister has committed to the revival of SEZs and Infrastructure of the country.  Towards this commitment, MAT exemption should be reinstated for the SEZ developers, Infrastructure developers and SEZ units.  It will boost the SEZ sector and overall development of the country.

Joint Development Arrangements have proved as blessings for the bleeding sector. It creates a Win-Win situation for both the developers and land owners/ailing developers. However, upfront taxation, unclear taxation policies, protracted tax litigation, GST sword despite recent clarifications are adversely impacting this business model. The Government should provide for clear taxation regime and the taxation should be deferred till the project is completed on the similar lines as relaxed taxation introduced for individuals that too with deferred taxation as and when the project is completed.

Deemed taxation provisions seeking to tax income on notional basis (and not real income) such as taxation of unsold inventory, stamp duty valuation based taxation levied under section 43CA and section 50C of the Act , etc. should be removed. Alternatively, section 43CA and section 50C should not be made applicable in certain situations like distress sale arising on account of various situations once it is proved by the assessee before the tax authorities.

The period of holding for long-term capital gains taxation for listed units of REITS and InvITs should be reduced to 12 months on the similar lines as listed shares so as to provide parity to these upcoming investment vehicles and to develop a robust investment platform for various stakeholders. Further, pass through taxation should be provided for two layer structures largely prevalent in the sector i.e. Hold Co and SPV structures.

Stamp Duty levy at every stage of transaction has been a major dampner for the massive potential growth of realty sector. In order to provide much needed Phillip to the sector, the stamp should be wither subsumed under the GST regime or alternatively, regime similar to MVAT should be introduced so that only incremental stamp duty is payable at each subsequent transaction and the present cascading effect is removed. This measures will significantly reduce tax incidence on homebuyers, will make housing affordable and foster the growth of the sector.

 

The present limit of overall deduction of interest on home loans uptoRs. 2 lacs has adversely impacted the home buyers and in turn has stagnated the purchasing spirit of the homebuyers. This limit should be extended at least uptoRs. 10 lacs to facilitate buying units in affordable housing projects.

In order to achieve the mission “Housing for All by 2022”, the Government should increase the deduction under section 80C for principal repayment of housing loan from the existing limit of INR 150,000 to INR 500,000.  Alternatively, introduce allowance of the entire purchase price (upto certain limit say Rs. 50 lacs) paid for FIRST House to individuals while computing their income and such allowance can be spread over a period of 5 years.

The overall deduction of interest cost uptoRs. 2 lacs, restricting the set-off of loss under the head “Income from House Property” against any other head of income up to Rs. 2,00,000 coupled with deemed taxation on unsold inventory has impacted thousands of buyers who have availed housing loans in the past based on the then prevailing provisions as well as the developers who are trapped under the huge debts and financial crunch.

Summing up

India’s strong economic fundamentals, coupled with the pro-reforms stance of the Government, have been instrumental in creating a more open and investor-friendly investment environment in recent years. This policy measures have attracted very large investors investing billions of dollars in the really sector especially commercial projects. Despite this, the recent fall out in the financial sector more particularly of NBFCs, the liquidity crunch continues to plague the sector. The Government should bring out radical changes discussed above though policy overhaul, facilitating flow of foreign funds through hybrid instruments and introducing much needed tax incentives/rationalizations in fiscal laws bail out currently ailing sector to perform better and continue to contribute to the Indian economy.

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