Amid the COVID-19 induced slowdown, sectors across the economy await the Union Budget 2021 with bated breath, and real estate is no exception. From subsuming the stamp duty under the Goods and Services Tax (GST) to the rationalisation of sunset clause for affordable housing projects, realty developers anticipate some unparalleled announcements in the forthcoming Budget 2021 that reduce construction costs and expedite project deliveries.
As the Finance Minister Nirmala Sitharaman is set to present the Union Budget 2021-22 on February 1, all sectors and industries have put forth their suggestions before the Centre. Real estate has also prepared its demand list and, expects the Government to solemnly mull over the proposals as the property market has been severely hit by the COVID-19 outbreak. Although the unchanged repo rates, relaxation in classification norms of Non-Performing Assets (NPAs), one-time restructuring of corporate and personal loans (including home loans) and the infusion of Rs 20,000 crore in the Public Sector Banks (PSBs) have been a few appreciation-worthy measures by the Centre, a legion of other unprecedented initiatives are vital to overhaul the aggrieved housing market.
According to Niranjan Hiranandani, National President, NAREDCO, "The pandemic has dished out a volley of structural and cyclical challenges. Hence, the budget expectations are on the lines of tax rationalisation, impetus for affordable housing, access to alternative funding and ease of doing business in the legal and regulatory framework. The revival of the real estate sector is imperative for the growth of Gross Domestic Product (GDP), additional employment generation and attracting investment from the domestic as well as global investor’s bandwagon.”
Here are the key expectations of the industry from the Union Budget 2021:
Access to alternate fund
The Indian housing sector remains plagued with several delayed projects due to an acute liquidity crunch. Over four lakh residential units are either stalled or delayed across the top metro cities. Hence, access to alternate funding is critical to expedite the construction of these unfinished projects.
Rakesh Reddy, Director, Aparna Constructions and Estates, avers that residential developers need robust capital flow to maintain supply and keep the property prices from surging. Therefore, the Government must allow some additional incentives for private sector investments as it would help both developers and homebuyers awaiting the completion of their dream abodes. Also, low-cost funding from financial institutes is crucial to improve the demand-supply disequilibrium in the housing sector.
Subsuming stamp duty under GST
“The re-introduction of GST with input tax credit on under-construction properties is vital as it will push the demand for ongoing projects and improve cash flow. The industry also expects Government to announce new and innovative reforms that infuse liquidity in the financially-distressed sector.”
Abhishek Jain, Chief Operating Officer, Satellite Developers Private Limited
"The Government must focus on tax incentives and GST waiver for under-construction units to mitigate builders’ grief. Even if it is for a limited period, the GST waiver will significantly curb the construction cost and increase the offtake of unsold residential stock that currently stands at around 4.62 lakh units."
Amit Goenka, MD and CEO, Nisus Finance
“Single window clearance would go a long way in augmenting the approval process and quicken the project execution. Also, lower home loan interest rates, reduction in stamp duty and registration charges will make a sizeable difference to a project cost, and catalyse the housing demand.”
Lincoln Bennet Rodrigues, Founder and Chairman, Bennet and Bernard Group
While the introduction of Goods and Services Tax (GST) has successfully eliminated multiple taxations in other businesses, the real estate sector continues to reel under its burden. A case in point is the under-construction properties, where both GST and stamp duty are levied, and the credit for stamp duty is not available under State GST.
According to Suresh Surana, Founder, RSM India, “Stamp duty is generally calculated on the asset value based on circle rate fixed by the State, which are in many cases higher than the market value or the value negotiated between seller and buyer. This makes seller and buyer both liable to pay tax on notional gain/profit under the provisions of sections 43CA, 50C and 56(2)(vii)(b), making the case of double taxation.”
In most States, the stamp duty ranges from 3-8 percent and is chargeable on the purchase of land as well as on the sale of properties without any offset of the earlier stamp duty. Therefore, to evade multiple taxes, it is essential that the stamp duty is subsumed under GST and permitted to be set off against SGST. While this will require a major reform both at Central and State levels and endorsement of the GST Council, it will make the real estate sector more competitive and eradicate distortions.
Rationalisation of sunset clause benefit for Affordable Housing Projects
While Section 80 IBA provides tax deduction on profits generated from the sale of affordable housing projects, developers cannot derive optimum benefit due to the imposition of Minimum Alternate Tax (MAT).
“Presently, even though developers claim 100 percent profits from the sale of affordable housing projects under Section 80 IBA of the IT Act, they have to pay tax on the book profits as Minimum Alternate Tax (MAT) is applicable on the same. This negates the tax benefits allowed to developers. Thus, the Government must think in this direction and remove the MAT provisions in order to facilitate optimum benefit to builders under sunset clause,” adds Surana.
Stricter laws around payment delays/defaults
Payment delays/defaults in the real estate sector have become a norm impacting the working capital cycles. While Insolvency and Bankruptcy Code, 2016 (IBC) is a significant reform to take legal action against defaulting customers, enforcement is still lengthy, complicated and costly. Also, post-COVID-19, any action under IBC for new defaults has been held in abeyance which has complicated the recovery process. The industry looks forward to additional steps to enforce payment disciplines and restore the lost momentum and businesses.
Amendment to Section 80IBA
At present, the benefit of Section 80IBA, i.e. affordable housing is available only to those housing projects which comply with the following conditions:
a. The project is approved after June 1, 2016, and before March 31, 2020
b. The project consists of units measuring up to 60 sq m in metro cities and 90 sq m in non-metro cities and the cost of these tenements shall not exceed Rs 45 lakh.
However, developers urge that these benefits shall be available to projects approved between June 2016 and December 2022 to coincide with PM’s ‘Housing for All by 2022’ scheme. Also, the cost limit of affordable units should be increased from Rs 45 lakh, since it is challenging to build an apartment within this budget in metro cities where land values are excessive.
While the grant of infrastructure status to the affordable housing segment two years ago has been a big push, the industry expects the Government to extend this benefit to the entire real estate sector. This would mean reduced borrowing rates and increased inflow of foreign and private capital. Moreover, developers believe that there could not be a more suitable time to accord industry status as the sector is aggrieved with numerous challenges. Precisely, it would be a profound measure to help the perturbed realtors and resuscitate the ailing industry.
Single window clearance
The residential sector is heading for consolidation in favour of leading developers, who are expected to mend customer confidence by assuring timely project deliveries. Hence, the Government must consider replacing the long, tardy and sluggish project approval mechanism with a single-window clearance. This will be a significant move towards eliminating the biggest problem in the real estate sector, i.e. project delays and will go a long way in improving the housing demand, shares, Santosh Agarwal CFO and Executive Director, AlphaCorp.
Additionally, new and innovative ways of infusing funds are vital, especially for capital intensive projects, such as township developments, business parks and massive infrastructure projects. However, given the increasing fiscal deficit, it remains to see what will find its way to minister’s draft and what all will go unheard again.