Though a routine annual activity – albeit among the most critical ones, and always looked forward to; this year’s budget was even more a subject of anxiety than usual, for multiple reasons: The high-profile event of demonetization preceding it and a series of state-legislature elections to follow (along with the advancement of budget-presentation by a month) had made 2017-18 budget one of the most awaited budgets in recent years. Consequently 2017-18 budgets were an extremely high-focus event and there had been a widespread anticipation of the budget being served as a ‘populist’ ‘vote-harvesting’ one or a landmark one.
When presented by India’s Finance Minister Arun Jaitley on 1 February, 2017, it turned out to be reformist and investor-confidence boosting. Rough sodding the widespread anticipation of the vote grabbing budget, it was well balanced and benefited all the critical sectors. The real estate is certainly a major beneficiary from this fiscal measure and was in fact, in dire need of a shot in the arm. Under the shadow of demonetization, the sector had been hit heavily during the last quarter of 2016 calendar. It needed a vital fillip and the Union Finance Minister Arun Jaitley ensured it was delivered.
By removing FIPB approval roadblock, the FM has made a positive move towards enabling investments in the economy. It can create a vital cascading effect for a lot of sectors, including real estate and urbanization processes. As is often stated, India’s ambitious growth plans for the next few decades require massive investments to the tune of US $ 250-300 billion. FDI's are an important mechanism for the same. This one step will go a long way in partially fulfilling the need.
Among the biggest demands of the real estate industry, since years, had been ‘infrastructure statuses for itself. Delivering a pleasant surprise, the budget this year grants the wish – at least partially. Affordable Housing now has the requisite ‘infrastructure-status’. It is roughly estimated that India needs nearly 20-million homes in affordable segment, the creation of which has been a subject of major debate and disagreement between various stakeholders, such as lack of ‘preferential-treatment’ or ‘infrastructure-status’. With this vital pronouncement, the government has evidently moved with intent. In addition, the pronouncement of 30 sq.m. and 60 sq.m. carpet area sizes and the removal of the 25-km restriction from municipal limits, eases the path for creation of affordable housing in a much more viable manner.
A series of tax-benefits have been awarded to buyers as well as sellers. These are clearly meant to spur the slackening demand. First of all, the scaling-back of tax-rate from 10 percent to 5 percent in the lowermost taxable segment of Rs 5 lakh should have a positive impact of rebuilding financial capabilities. This bodes well for reactivating housing purchases in the sub-Rs 20 lakh segment. Coupled with interest-rate subventions announced on New Year eve, one can look forward to a renewed demand-push. Also, by abolishing cash-payments above Rs 3 lakhs in any transaction, the attempt to clean-up the system of ‘black-money’ takes a further step. Cash-component in real estate has been a major source of trouble, and is a major cause for inflation in real estate prices – particularly in the housing sector.
Yet another measure that helps the sector is the lowering of time-frame from 3 to 2 years, for calculation Long-term Capital Gains tax. This can have a significant impact on secondary market for housing. Added to this, is the move of indexation to a more realistic 2011 from 1981.
A major push to the economy, real estate and job-creation is the emphasis placed on infrastructure sector in the budget. Allocation of Rs 2.41 lakh crores for transportation, and an overall Rs 3.96 lakh crores are worthwhile pronouncements. It is an area that needs constant support for regeneration of the sagging economy and for job-creations, which help revitalize the demand for real estate. Union Budget 2017 would positively impact the real estate sector, from the perspective of middle-class end-consumers. According ‘affordable housing’, the ‘infrastructure status’, would boost investment of private players in the affordable housing campaign. The involvement of private players would lead to competition, which in-turn would provide better options for the middle-class and lower-middle class aiming to buy their first homes.
A new Credit Linked Subsidy Scheme for the middle-income group with a provision of INR 1,000 crore in 2017-18 was announced. Also, extension of tenure of loans under the CLSS of Pradhan Mantri Awas Yojana (PMAY) was increased to 20 years from the existing 15 years. The promoters of affordable housing projects will benefit from the cushion of two additional years for completing their projects, instead of the earlier timeline of within three years.
Industry captains have welcomed the budget. Anuj Puri, Chairman and Country Head, JLL India, acknowledged the increased allocation to Pradhan Mantri Awas Yojana from Rs. 15,000 crore to Rs. 23,000 crore in the rural areas. “This is very significant, because it will provide the vital budget housing segment with cheaper sources of finance including, but not restricted to, external commercial borrowings. Also, re-financing of housing loans by NHB’s can give a leg up to the sector,” he said in a statement issued to the press.
Brotin Banerjee, Managing Director & Chief Executive Officer, Tata Housing Development Co, too hailed the affordable housing announcement and said that a long-standing demand of the sector had now been met. “Easy and dedicated access to institutional financing and higher limit on external commercial borrowings will attract more investments and assure sustained growth of affordable housing in India, making it the core driving segment for real estate,” he said. “On the other hand, long-term financing at lower rates will reduce costs of construction for developers, allowing them to pass on benefits to consumers. The new status will increase resource allocation for the sector, catalyzing housing supply and reducing the supply gap.”
Increasing the tax incentives for first-time buyers was a long-pending demand before the government. Presently, the government provides tax deduction upto Rs 2 lakh on purchase of residential properties. The tax sop is reduced to Rs 30,000, if the buyer has invested in a developing project, which takes more than three years for completion. Experts had demanded the government to increase the tax sop to Rs 5 lakh for first-time buyers, and remove the clause of reduced tax benefits on investment in ongoing projects. However, no beneficial action was taken in the budget.
The real estate sector contributes approximately 15 per cent of India’s GDP. Experts had consistently been demanding the government to allot ‘industry statuses to real estate sector as well. Since the real estate sector is not included among the categories of industry, developers, builders and investors are often compelled to avail loans at higher rate of interests. Due to the hefty interest rate loans, constructors are compelled to face shortage of funds. The end result is delayed completion of projects, impacting the end consumer in adverse manner.
Project clearance is another major hurdle faced by the real estate players. Developers have complained of stiff bureaucratic control, which delays the constructions in unprecedented manner. The real estate sector had demanded Finance Minister Arun Jaitley to grant ‘single window clearance’, which would facilitate smooth execution of projects.
Industry experts had demanded the government to issue clarity regarding the Pradhan Mantri Awas Yojana (PMAY). Under the scheme, government announced that an interest rate of only 4 per cent would be charged on loans above Rs 9 lakh and 3 per cent on amount above Rs 12 lakh. However, there is ambiguity whether those not falling under EWS (Economically Weaker Section) or the LIG (Low Income Group) segments would be the beneficiaries…Check information in red. As per my knowledge, there is interest subsidy of 4% on loan upto 9 Lacs and 3% on loan upto 12 Lacs.
Overall, as said earlier, the budget seems to have delivered to real estate, the much-needed oxygen, which it had been gasping for since the last few years; and especially after demonetization. The budget did leave a few things to be desired – such as lowering of excise and benefits to larger corporate-sector, in view of perceived hits from recent developments in the US on H-1B visas. A bit of refocus on the SEZs for support to IT-sector would have done some more wonders. It is a general anticipation that the government will keep its eyes firmly on these, as the year rolls ahead. GST would be the next most-watched reform that India awaits. The good news after February-1, however, is that the country seems to have begun a rejuvenation process, which it is poised to take forward.
However, there are still some pain points and the key ones being:1. Industrial Approach Towards Taxation:
Across the manufacturing sector, taxes like excise duty are payable on delivery of product. In real estate, most of the taxes are payable either at the approval stage or at the time of booking a home. The earlier argument against delivery-based tax-collection was that there was no security mechanism for government to collect taxes from developers. But now the RERA-mandated Project Escrow Account can provide enough security for collection of government taxes. The purpose is not just reduction of cost of homes but a more strategic one. Linking government revenues to delivery of projects will make government authorities stakeholders in housing projects and will make them morally responsible towards completion of projects. The role of government authorities will shift from being value extractors to co-partners in real estate projects thus, benefiting both developers and home buyers.2. GST Benefit to Entire Supply Chain:
"Taxes paid on inputs can be offset against taxes paid on finished product." GST aims to achieve the above for all products except homes. Stamp duty on land, municipal taxes and so on paid by developers cannot be offset against stamp duty/VAT paid by home buyers, resulting in high costs due to the cascading effect. Classifying all taxes paid by developers as GST is not only fair and justified, but also works towards making homes affordable.3. Equity in Property Assessment Taxes:
In any city, citizens staying in old homes constitute over 90 per cent of the population. State governments and municipal corporations find it politically unfriendly to increase house tax on old homes. This results in high maintenance cost for new homes. The central government needs to step in and bring in parity by restricting the maximum difference in taxation rate between old and new homes.4. Home Buyers Fund for Distressed Projects:
Many projects are currently stuck midway because developers lack funds. Those who have booked homes have lost faith and do not want to pay more, new buyers are not in sight and banks do not want to fund them. Such incomplete projects have not only resulted in loss of faith but have also restricted housing supply as they are sitting on large parcels of land. Moreover, state governments and municipal corporations are clueless.
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