Hike in tax rebate on housing loan interest rate may result in healthier demand for housing, says Ankur Jain

By Ankur Jain

The countdown to Union Budget 2020 – 21 has begun. With a surmounting pressure owing to the present state of economy, Finance Minister Ms. Nirmala Sitharaman is ostensive at her final lap with her presentation for this budget. Indian real estate sector which contributes over 8 percent to the Indian economy is suffering from slow and stagnant sale since quite some time. The sector has some justifiable expectations from this budget. The developers came forward and aired their demands in context of the present off-putting situation.

Current Challenges:

The industry opined about the provisions that create genuine hardships for the real estate developers by putting them under pressure in this ongoing sluggish market situation. Large unsold inventories are one of the pain-points. As per section 23(5) of the income tax act, taxing notional rent after one year of receiving completion certificate will lead to severe financial implications to the developers, and in turn will cost to the industry. This situation may also lead to no further launch of new projects. In the recent past, the industry had to cope up with institutional changes viz. RERA, GST, IBC, etc. The fall in GDP growth rate from approximately 8 percent to 5 percent also affected the sector adversely in terms of demands.

Expectations:

A hike in tax rebate on housing loan interest rate may result in healthier demand for housing, especially in the affordable and mid-segment categories.

An upward revision in personal tax relief – either in the form of a cut in tax rate or favourable readjustment of tax slabs –which is long overdue. Last revision was done in 2014 which was about setting a deduction limit of INR. 1.5 lakh a year u/s. 80C.

An inclusion of ITC benefit in GST for under-construction homes is also in the wish-list. While the GST rate on under-construction properties was reduced to 5 percent in 2019, ITC was shelved. Providing ITC benefits would be a great incentive to make the under-construction homes attractive.

The cap for a project to be qualified as affordable should be increased to Rs. 1 cr for major metro cities. This will further help in reducing overall acquisition cost of residential units for middle class.

A provision for ease of liquidity would also make the situation favourable, as the ongoing overall liquidity crunch bears a cascading impact upon real estate sector too. Project delays are the biggest fall out of the cash crunch and have dampening effect on buyers’ sentiment. Capital flow for the developers would invariably be enhanced with the ease of liquidity, thus keeping the supply healthy – mostly for the high-demand ready-to-move-in homes. This will also keep the prices in check.

Developers are unable to get funding from banks and NBFCs at lower interest rates which is the need of the hour for this critical sector. A context of crisis in NBFC sector, which eventually hit hard the real estate sector, provides strong-enough justification to warrant credit off-take. Along with recapitalization by the government and the stringent stipulation enforced by RBI, gross NPA of banks has been improved to 9.1 percent as per the record of Sep 2019 and in comparison to 11.2 percent of the preceding year.

There is a dire need to iron out the bottlenecks to the infrastructure growth. Even though the Government’s focus on infrastructure development do come as a boost, its plan to spend INR. 100-lakh crore on infrastructure over next 5 years can only yield tangible result.

There is also a major need for implementation of land reforms. Companies planning to build up factories can only avail the benefit of new lower 15 % tax rate, if they can acquire the land easily. UID implementation for land may bring greater transparency to India’s outdated land record system. This has a potential to attract more foreign investors and to strengthen the approval procedure for real estate projects.

Conclusion:

Real estate being one of the most crucial pillars for Indian economy, to re-induce the growth here, it is important for the Government to impart the sector an industry status. This would enable the developers to cut capital costs and to pass on the benefits so derived to the consumers. A single window clearance mechanism is a long pending expectation of the sector as it will facilitate the quicker completion of the projects. Apart from that, elimination of taxes on vacant property, increase in the limit of interest deduction paid on a home-loan, ensuring tax realization on REITs, lowering land acquisition costs, etc. are certain factorials that would definitely impart a favourable impetus to the sector. Such measures will play an incremental role in streamlining the Indian real estate sector for the long run. Considering the prospective contribution of real estate sector to Indian economy, a strong hope is there that government will come out as the most prominent nodal point for developer-investor coopetition with beneficial initiatives for the betterment of the real estate market in the upcoming budget.

(The writer is the CEO of Group Satellite)