EXPECTATIONS FOR A BIG BANG BUDGET
VARIOUS INDUSTRIES HAVE COME UP WITH THEIR OWN SET OF DEMANDS BUT ONE DEMAND THAT REMAINS UNEQUIVOCAL FROM INDIAN INC. IS TO BRING BACK THE REQUIRED LIQUIDITY AND PUT THE ECONOMY ON TRACK.
BY: SAPNA SRIVASTAVA
As the Union Budget 2020-2021 is all set to be presented next month, expectations from this budget are higher than before, because of the pandemic induced slowdown, Indian economy is going through. The businesses are looking forward to landmark policies and stronger governance to boost manufacturing, infrastructure and investor friendly climate that will be beneficial in the long run.
With widespread anti-China sentiments, the Indian manufacturing sector has become one of the most attractive destinations for global manufacturers. Additionally, government’s recent announcements to push infrastructure and construction sectors have come as a good news. Backed by right fiscal policies in the union budget these initiatives should ramp up the recovery prospects this year. Finance Minister Nirmala Sitharaman has already concluded pre-Budget consultations with the captains of industry, and the process of preparing the budget is on.
As per Bibek Debroy, Chairman, Economic Advisory Council to the Prime Minister, “Budget is not only about revenue and expenditure. It’s also about policy content and intent. This budget is important as it should shape public expenditure in social and physical infrastructure, state a medium-term fiscal policy, detail an environment for private-sector investment, introduce reforms in land, labor and capital markets, and incorporate technology to improve governance. That’s what big bang budgets are about— setting the tone for the next ten years.”
THE BUDGETARY CONSIDERATIONS
As per industry experts estimates, overall revenue, after accounting for the shortfall in divestment, could be about 2.7% of GDP, Deutsche Bank estimates. Total expenditure could be higher than FY21 budget estimate by about 1% of GDP due to the increase in government spending on account of Covid-19 relief. The RBI’s latest bulletin stated, more evidence to show that the Indian economy is reflating at a pace that beats most predictions. If the current momentum is maintained and business sentiments continue to stay positive, the additional fiscal support can broaden the recovery faster.
As per Confederation of Indian Industry (CII), the three-pronged strategy for Union Budget 2021, should center on the key themes of growth, fiscal consolidation, and strengthening of the financial sector targeted to overcome the impact of the COVID-19 pandemic on the economy. The CII suggests bringing down government’s stake in public sector banks (PSB) to below 50 percent through the market route, over the next 12 months, except for 3-4 large PSBs such as State Bank of India, Bank of Baroda, and the Union Bank of India. It further recommended that the government create state-owned, professionally managed Development Finance Institutions (DFIs) to finance key sectors of the economy, on the lines of KfW Germany, Brazil Development Bank (BNDES), and Korea Development Bank. This could be achieved by infusing equity into NABARD for financing agriculture and rural sector, SIDBI for financing MSMEs and IIFCL for financing infrastructure.
Federation of Indian Chambers of Commerce and Industry (FICCI) is of the view that the Union Budget 2021-22 should look to double the Section 80C limit to Rs 3 lakh which will boost further investment and increase tax savings for an individual encouraging consumption.
The fiscal deficit for FY21 have soared to 7-8% of GDP and general government debt is expected to soar to as much as 90% of GDP this fiscal. On a brighter side, most analysts have bettered their growth projections. The latest projections for a contraction in India’s real GDP for FY21 are in the 7.7-10% range with an expectation of a sharp rebound (about 9-11% expansion) in the next fiscal.
The government has a tough task ahead and a tall order of demands and expectations to fulfill. Undoubtedly. Budget 2021 will have to spell out the road map for growth of Indian economy in the near future.
REAL ESTATE BUDGET HOPES
As per the National Statistics Office, the estimated H2FY21 recovery in overall growth will likely be driven by services sector led by real estate services. A slew of measures including RBI’s repo rate cut of 140 bps, resulting in a fair lowering of interest rates, a six-month moratorium on EMIs, monetary and fiscal assistance to real estate companies at the project level brought some operational efficiency in the latter part of 2020.
The realty experts recommend structured financing impetuses in the upcoming budget. The real estate sector requires demand-generating measures such as, tax relief to buyers including removal of tax surcharges for purchasing homes, expanding the availability of income tax deductions for home buyers and a simplified personal income tax regime. This will increase the disposable income for potential homebuyers and widen the market opportunity. For instance, providing personal tax relief, either by tax rate reductions or amended tax cost of construction thereby limiting the affordability quotient of the consumer. These critical construction materials be taxed at a lower GST rate especially for affordable housing to meet the intended objective of housing for all.
Transfer of development rights is liable to GST as a service at the rate of 18 per cent. However, the sale of land and building is outside the purview of GST. The grant of development rights coupled with conveyance in land in favour of residents is akin to sale of land. The GST payable on such development rights increases the cost of construction without any input tax credit.
As per Section 54, the taxpayer is allowed to claim refund of accumulated Input Tax Credit on account of inverted duty structure. However, real estate developers are restricted from claiming such refund leading to increased tax cost and discrimination in taxation policy. Making the said refund available to the real estate sector would help developers in offering reduced prices to the end consumer.
Another concern in the real estate industry from a consumer standpoint is the levy of GST on the common area maintenance charges recovered by the housing societies. The housing society functions on the co operative principles and values of democracy, equity, equality and solidarity. Therefore, there is no service by the society to its members and also there is no consideration. Hence, the government should exclude the maintenance charges collected by the housing society from the purview of GST. This will provide a much-needed relief to the flat owners and will reduce their burden.
The CII has suggested that the budget proposals, focus on growth, and look at fiscal management from a three-year perspective. Disinvestment and monetization of assets can bring in revenues at a time when tax revenues have fallen sharply.
Government expenditure should be prioritized in three areas- infrastructure, healthcare, and sustainability. The budget proposals should also address two critical areas of boosting private investments and providing support for employment generation.
REVISITING GST ON REAL ESTATE SERVICES
One of the major concerns for realty sector is the GST waiver for under-construction homes – The present GST rate on under-construction properties is 5% minus the ITC benefit for premium homes (>INR 45 lakh) and 1% for affordable homes (<INR 45 lakh). Even a limited period waiver of GST will reduce overall property cost and thus push demand for under-construction homes, which have been slacking presently.
The government should also revisit the GST rates levied on the construction materials especially cement and other raw materials. Rationalizing the GST rates of these commodities will bring down the burden of construction cost and the overall pricing.
Key construction materials attract higher GST rates such as cement (28 per cent), steel (18 per cent), tiles (18-28 per cent), etc. This leads to increased cost of construction thereby limiting the affordability quotient of the consumer. These critical construction materials be taxed at a lower GST rate especially for affordable housing to meet the intended objective of housing for all.
Given that real estate contributes more than 8 percent to the Indian economy, the industry is expecting a round of measures to help faster revival of the sector. It looks forward to additional considerations that includes attention to challenges of liquidity to complete ongoing projects and pushing demand for under-construction homes. The government also needs to focus on strengthening the consumer’s capacity by way of more efficient tax rebates and increased tax reliefs to prospective homebuyers.