Union Budget 2021: Real estate needs further incentives, says SmartOwner CEO

By Vikram Chari

The real estate sector in India is the second-largest employer after agriculture while also contributing close to 6-7% of the national gross domestic product (GDP) and this share is expected to grow to an even higher 13% in the next five years. As a result of the multiple lockdowns in the past year and the ensuing labour shortage, it has been a tough period for real estate in India. Various measures were announced by the government last year and the expectation is high from the Union Budget 2021 to provide further incentives to the sector at both the macro level for the industry as well as at the micro level for the home buyers, to aid its revival.

First of all, with the manner in which residential real estate defines the outline of all cities big and small, and the sheer size of employment it generates, it is time for the entire sector, irrespective of sub-segments, to be granted the infrastructure status. This should also be followed by banks including the sector in the priority lending list to enable the sector to benefit from the prevailing low interest rates. Presently only the affordable housing segment can avail itself of this classification.

The time is also ripe to streamline the goods and services tax (GST) structure for all housing projects to a uniform rate of 1%. Currently, there exists a two-tiered system of 1% for affordable housing and 5% for all others. A number of under-construction projects that are at an advanced stage of construction are currently witnessing low transaction volumes due to the preference of buyers to wait for completion to save the 5% GST. The reduction in GST slabs to a uniform 1% may boost sales revenues for developers with projects at advanced stages of construction with buyers not having to wait until completion to initiate their purchases. An additional aspect to GST that is expected from the budget this year is the reintroduction of input tax credit (ITC) for developers to be able to claim GST expenses incurred in construction activities. Both these policy decisions on GST, if introduced, will provide the much-required liquidity to a number of cash-strapped developers and the fillip to the sector as such

The affordable housing segment as per the present definition has a cap of 646 square feet in metro locations and 969 square feet in non-metro locations, in addition to a price cap of Rs 45 lakhs across all locations. The size restrictions on such homes are quite unrealistic and do not take into account the needs of the families of people on a budget. With the cost of land acquisition and construction being quite high especially in some of the large metro locations, the price cap makes most areas in some of the top metro cities out of bounds for affordable housing projects. This has resulted in developers planning projects in this segment with no other choice but to consider outskirts of cities for these projects, with most such areas not being convenient for homebuyers in this segment. The removal of the price cap altogether and an increase in the size cap for these homes, will have more developers being interested in the segment and have projects within city limits in the affordable housing category.

India’s urban population is expected to grow by more than 150 million this decade, which could put undue pressure on the infrastructure of the top cities in the country. The government, taking note of this trend should also encourage incentives and tax breaks for the private sector to invest in large scale in the infrastructure development of all such cities, including ones beyond the top cities.

At the consumer level, the wish list includes an increase in the tax rebate on housing loan interest from the current limit of 2 lakhs to 5 lakhs under section 24 of the Income Tax Act. The Pradhan Mantri Awas Yojana (PMAY) credit-linked subsidy scheme (CLSS) that provides interest subsidy for the lower and middle-income segments of the population availing themselves of housing loans ends March 2021. There is an expectation for the PMAY CLSS scheme to be extended by another year. Additionally, if the registration and stamp duty charges for home purchases be included in the GST linked to construction activities, it could lead to a surge in demand for homes in 2021.

While the macro-level incentives and policy changes will definitely provide the support to the industry, the consumer level incentives will not only benefit the home buyers but also increase demand for homes, thereby providing a healthy boost to the industry as well. The real estate sector has been hit quite hard by the pandemic - a once in a lifetime occurrence, like most other sectors and has its hopes pinned high on the union budget this time more than ever in the past, to get back on track to become the country’s prime contributor to both GDP and employment.

(The author is CEO of SmartOwner)