Corporate tax cut, new Fund good for property sector

Corporate tax cut, new Fund good for property sector

A moot point now, in the residential real estate space, is whether the industry will use the new-found liquidity to bring down prices and piled up inventory, launch more projects in view of expected demand or pare debt. 

In one of the most significant moves to boost the sagging economy, the government slashed the corporate tax rate for domestic companies to 22% from 30%, at a cost of Rs 1.45 lakh crore to the exchequer. Now, the effective tax rate applicable for companies paying statutory corporate tax at 22% is 25.17%, including all levies. While the move received a standing ovation from the stock markets that registered huge gains over the following sessions, it remains to be seen if the tax break is good enough to boost the realty market that desperately needs a shot in the arm. 

What came as more good news for the real estate sector was the proposed creation of the Alternate Investment Fund (AIF) by the Centre. The targeted corpus of Rs 25,000 crore for the completion of stalled projects is welcome news for both the beleaguered sector and homebuyers committed to these projects and in deep trouble. The property industry hailed the tax break as it gains in many ways if it pushes growth in the economy. As a ripple effect, with India competing well as a favourable investment destination, real estate will gain with higher demand for both commercial and residential property. Industry watchers feel this move will encourage foreign investments, push the manufacturing industry and lead to more demand for the construction sector with heightened industrial activity.  

A moot point now, in the residential real estate space, is whether the industry will use the new-found liquidity to bring down prices and piled up inventory, launch more projects in view of expected demand or pare debt. While there is no official data on unsold stock being held by developers across the country, industry sources estimate a large number. Significantly, with a lower tax rate, those developers who have their order books full will have more cash in hand. Given the cost of borrowed funds, they are expected to use this surplus cash in hand to service debt and bring down their interest costs. 

They are also expected to use this additional cash flow to promote their projects. Homebuyers can expect some freebies as the competition heats up with the added liquidity. Construction costs have been hovering around Rs 2,900 per sq ft. There’s an 18% per cent GST to be added to it now. This is a big hit because developers cannot get the input credit benefit. With the cost of labour and material rising steadily, builders don’t have much leeway on this front.

While passing on some of the benefit to buyers is something developers will look at, debt servicing too is crucial for survival. Long-term debt servicing cannot continue beyond a level. Also, this phase in the cycle the industry is going through has been long and developers are now looking at kickstarting growth soon. So, they will strike a balance between using the surplus funds to incentivise buyers coming on board now and debt servicing.

Yet, buyers can expect some freebies such as a kitchen, other amenities, etc. This is a workable option and one that developers would prefer to reducing prices. Bringing down the prices means a project moves into a lower price bracket. This does not make sound marketing sense. Price rise in real estate in recent times is more due to the rising costs of construction and land acquisition. In case of buildings, there are holding costs. There is a time lag between development of a project and offtake. The builder incurs the costs of holding the stock in this period. 

Now, with the market having been sluggish for some time, this cost is high. So, it won’t be possible to slash prices. A moot point about this tax break is that it is applicable only to those who are not under any specific benefit. For example, developers who have projects under special purpose vehicles (SPV) for the development of affordable housing, pay tax under the minimum alternate tax (MAT) scheme. They don’t get this break. The benefit will have a different impact in various segments. Developers in the luxury segment don’t get any tax benefits and will be eligible for this tax break. Many of them are stressed out and will use this money to pare debt. Here, freebies don’t make sense. 

Paring debt

The industry view seems to be leaning towards a mix of paring debt and some freebies to push stock. Developers paring debt augurs well for the sector as it lowers risk for lenders and enhances builders’ creditworthiness. Developers without large inventories may use this surplus to aggregate land. From a corporate perspective, the surplus cash should not be used for more developments. Then, it will add to profits that are under pressure. The balance sheets will look healthier and this is good for the industry. Going forward, for healthy growth, a more holistic view and long-term measures are needed.

A reduction in stamp duty, rationalisation of guidance values and doing away with double taxation (a buyer pays GST, stamp duty and registration fee) should be looked at.
With ‘one nation, one tax’ in place, the case for rationalisation of stamp duty across the country is stronger.

For the moment, with a large number of stalled projects gaining a new lease of life, and lower tax, realty companies are set for better days. A robust sector is good for the economy as it creates demand and employment in the core sectors. It augurs well for the struggling economy as it contributes around 8% of the GDP.

(The writer is a senior journalist based in Bengaluru)

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