CREDAI Open Letter To PM
CREDAI representing more than 20, 000 developers across the country has written an open letter to PM Sh. Narendra Modi seeking immediate measures to revive the ailing real estate sector, which remains one of the most affected sectors due to COVID 19. According to CREDAI, The sectors survival is crucial for the economy. Liquidity crunch, stagnant demand and cartelization of the raw material are major impediments for the Real Estate Industry to kick start.
“We have done our best possible to mitigate the plight of the labour force (about 52 million employed in the sector) in terms of providing them food & shelter. We contribute substantially to the GDP & account for almost 11% of bank credit besides having backward & forward linkages with almost 250 industries including cement & steel etc. We, therefore, pray for immediate intervention on the following recommendations:
One Time Restructuring: Since real estate was already reeling under a cyclical downturn before COVID-19, such restructuring needs to be allowed for all accounts which were standard as on 31.12.2019.
Additional Institutional Funding: Additional credit equal to 20% of the existing real estate project related advances (whether by way or working capital or term loan or NCD’s or any other instrument through banks/NBFC/HFC’s or any financial institute) at the MCLR with no additional security, if need be by extending Government guarantees, without the classification of the project as NPA.
Waiver of Penal Interest: It is requested that the penal interest charged by Banks and Financial Institutions are suspended for a period of one year or until such time as it takes for the pandemic to abate
Policy Innovations for Triggering Demand/ Customer- centric Tax Treatment of Real Estate
- Government should reduce the maximum rate of interest on new home loans to 5% by subsidizing interest component of EMIs for next five years.
- Limit of Principal deduction on housing loan under Section 80C should be increased to 2.5 Lakhs.
- Interest deduction under Section 24 on housing loan for homebuyers may be increased to Rs. 10 lakhs.
- There should be no capital gains for residential properties held for a period of longer than 1 year
- To avert economic ruin due to collapse of housing market, it is imperative at this time that NHB and RBI withdraw circulars and direct resumption of subvention-based funding with only safeguards being the acceptable rating of the developers and the project.
- A scheme whereby a homebuyer would need to pay only margin money with no EMI for 24 months will address this insecurity. Hence, RBI may allow HFCs a 24 months subvention scheme to homebuyers from developers. This 24 months’ subvention be adjusted by extending the loan tenure by 24 months with subvention amount recovered in the last 2 months.
Control on Cartelization of Raw Material for Construction: The abrupt increase in the prices is highly unethical and amounts to unfair and restrictive trade practices. Controlling this prise rise is highly essential for the construction to be started in full swing and to get the country’s economy back on its growth path.
Applicability of GST and its Input Tax Credit (ITC) on Real Estate: The current regime of GST provides a rate of @1% for Affordable Housing. The limit of Rs. 45 lakhs serves as a criterion of affordability for the purpose of GST. On all other housing, GST is applied at the rate of 5% without input tax credit. It has been felt that the criterion of Rs. 45 lakhs is too low an index of affordability anywhere across the country, and especially so in the metros.
Secondly, the flat rate of GST @5% for under construction residential housing is causing cost build up and is acting as a deterrent to the sale of under construction projects. It also needs no reiteration that the very principle of GST consists in availing input tax credit.
- It will serve as an inducement to buyers in the metros if the benefit of GST at the rate of 1% is extended to units costing up to Rs. 75 lakhs.
- The scheme of 5%/1% (for affordable housing) with no benefit of ITC may continue. However, an option of GST @12% for normal housing/ 8% for affordable housing (with 1/3rd deduction for land i.e. – effective GST rate of 8% for normal housing and effective GST rate of 5% for affordable housing) with ITC benefits in line with the scheme applicable for the works contracts for Government may be revived and made applicable to the Real Estate.
Quick operationalization of SWAMIH Fund: Last year, Central Government had set up the AIF – SWAMIH Investment fund of Rs. 25,000 crores as a special window to expedite completion of stalled Affordable and Mid-Income Housing projects and infused Rs. 5000 crores. However, actual disbursements from the project have been minimal.
The mandate, wherein the existing lender (Banks/ NBFC’s/HFC’s/) is not being accommodated at all. The AIF expects a return of about 12-15% on its investments in projects, which is very high given the fact that the projects in the ambit of the fund are “stalled”. Given the current crisis at hand, it is only fair to ask that the fund given by GOI is disbursed quickly to complete stuck projects. Given the cuts in repo rates announced by RBI to 4%, the fund should be given within an expected RoI of 8- 9%.