Union Budget 2021 brings hopes and expectations to the Real Estate Sector

  • In order to build a holistic and sustainable developing infrastructure, the growth in real estate plays a broader towards integrating various long-scaled approaches.
  • The dynamics of the real estate sector and its stakeholders witnessed a significant impact due to the covid-19 pandemic; however, the industry experts expects that the upcoming Union Budget 2021 would pave the way for opportunity and recovery. Being one of the largest contributors to the GDP of the Indian economy, the real estate sector would be instrumental in bringing back the nation’s economic growth and stability.
  • With the extension of CLSS (Credit Linked Housing Subsidy Scheme) and GST rated homes afforded to under-construction, the sector is encouraged by both the Central and State Government to reduce the repo rate under the Union Budget of 2021. Somehow it is also seen that the sector wants liquidity support from the Government by raising norms based on funds and wanting to improve the stalled projects by providing alternative investment funds likewise SWAMIH.
  • The Reserve Bank of India’s (RBI) upward revision in the growth forecast to -7.5 percent for fiscal 2020-21. It reinforces the government’s view that the economy is in a V-shaped recovery with a faster paced indicator pointing towards the current GDP transforming it into a positive note in the second half of the current financial year.At the same time, attaining thenew heights by the markets based on equities are driven by optimism around early Q3 corporate earnings results.
  • While the government has made necessary and timely interventions through liquidity infusion, fiscal support and reform-driven investments, the focus has been mainly on the supply side to revive the ailing economy. It will now be critical to inject several demand-side measures to sustain the pace of the recovery and get the economy back on its feet. While we have seen a continuance of recovery in the fourth quarter which started in Q3 2020, the actual market transaction volumes continue to be lower compared to pre-COVID levels within the real estate sector.
  • Considering the growing demand for affordable housing, there should be a synchronisation of state affordable housing policies with central policies to increase compliance in the procedures. We would request the Government to provide additional funds to incentivise affordable housing projects. Furthermore, this segment should be capped to Rs 90 lakhs in metro cities and Rs 75 lakhs in mini-metros to boost homebuyer sentiments.
  • Additionally, the individual tax brackets that currently provide home loan benefits up to Rs 1.5 lakh for principal payment and Rs 2 lakh for interest payment should be increased upto Rs 5 lakh will encourage home buyers to pay their loans faster. The 20 percent deviation from the FM last year’s circle rates until June 2021 for homes costing up to Rs 2 crore should not be time-bound and needs to be extended for all real estate asset classes. With the pandemic situation for the entire year, we believe that the Income Tax Holiday should be extended to March 2022 as it will encourage developers to build more affordable projects. Along with this, the 1 percent GST for Affordable housing needs to be prolonged until Dec 2023 and the stamp duty should also be exempted.
  • As the economy continues to unlock with businesses returning to normalcy, Budget 2021 is significant as it will play a pivotal role in laying out the contours for the next phase of economic development. In this context, we believe that the following additional measures will aid in spurring consumption, investment; thus, resulting in the sustenance of a recovery led growth in the next few quarters.
  • While the government has already provided ‘infrastructure’ status to affordable housing, the long-standing demand of according ‘industry’ status to the overall real estate sector remains unfulfilled. The growth of real estate sector has its linkages and impact on multiple sectors and hence warrants an integrated approach for holistic and sustainable development. Since the sector has already witnessed landmark structural reforms resulting in increased transparency, accountability and efficiency, granting of ‘industry’ will further fuel investment and employment.
  • Since Union Budget is hope for both the developers and buyers, the introduction to reforms such as tax sops and correction in prices may result in whether the decision will further benefit the industry and stabilize it or not. Following are the various measure industry expects:

[1] Circle rates:

 For the real estate sector, the 20% deviation from the circle rates announced by the finance minister last year until June 2021 for homes costing up to Rs 2 crore, should not be time-bound and needs to be extended for all real estate asset classes.
 The same will allow developers to offload the massive build-up of unsold inventory costing more than Rs 2 crore.
 Stamp duty for land purchase in affordable housing should be reduced or removed for the next few years to promote the launch of such homes.

[2] GST:

 The industry has been requesting for a GST removal on under construction homes to bring it on parity with ready homes which have no GST levy.
 There is a possibility of a set off in the GST paid on input materials during construction phase against the rent and other income from properties unless it is completed.
 Since the implementation of GST on transfer of development rights (TDR) is being interpreted for application of GST on transfer of right to develop the land. Due to these amendments, most of the projects either residential or commercial has reduced significantly.

[3] Income tax:

 Section 80 C has a deduction upon the home loan principal repayment and further not going to provide a focused benefit for any housing.
 A separate annual deduction of INR 150,000 will provide the much-needed fillip to opt for house purchase for boosting the demand and providing relief to the home buyers.
 A revision of the cap of Rs. 2 lakhs to a substantially higher number on housing loans under section 24(b) of the Income Tax Act resulting in increased savings and provide a boost in clearing premium stocks.
 There is also a need for revising the affordable housing cap of Rs. 45 lakhs to a higher number considering the prices of land and construction in metro cities.

[4] Rent:

 The period of exemption from levy of tax on notional rent, on unsold inventories, needs to be extended to 3-5 years from two after receiving the occupation certificate.

[5] CLSS:

 100 percent tax deduction under section 80 IBA and the additional tax deduction of up to Rs 1.5 lakh for interest payments on housing loans taken for the affordable housing scheme, at least by a year till the market stabilizes.
 Deadline for CLSS is extended up to 31st March 2023.
 The upfront amount of the CLSS subsidy should be increased to INR 3.5 lakhs (from the current level of Rs 2.3-2.67 lakhs depending on the income category).

[6] REIT:

 For REIT, the government shall reduce the timelines of investment from three years to one year for long-term capital gains taxation.

[7] Stress fund:

 The government may also make provisions for direct infusion of funds in the sector through existing channels like SWAMIH funds and SWAMIH funds-II that can contribute around 50% capital to the country’s GDP.
 Their regional offices to be built in Tier 2 and 3 cities.

[8] Affordable housing:

 Technology import (like aluminium shuttering used in AFW) for construction of affordable housing from other countries should be free from custom duty.
 GST on material and services used in affordable housing should be reduced to 50% or brought to single digit.

[9] Building material cost:

 A reduction in the GST on building materials from the current 18% to 5% which is known to be a vital raw material for infrastructure and real-estate currently attracting GST of 28% which is the rate at which luxury items are taxed.

[10] Tiles industry:

 The current GST rate of 18% is way more than the desired 12% – a request which the government can consider including Natural Gas under the tax regime.
 Natural gas is approximately 18–20% of the total cost and is one of the cleanest sources of fuels.

Extension of benefit u/s 80EEA

  1. Principal repayment on home loans:

 A separate provision allowing deduction of principal repayment (currently forming part of 80C deduction) will provide homebuyers higher tax benefits towards the latter stage of the loan tenure.
 This will be a timely relief in the current scenario where several homebuyers are grappling with honouring financial commitments.

  1. Setting off loss from house property:

 The removal of 2017 Finance Bill restriction will enable the individual to claim the entire interest on his let-out property without any limit, resulting in a higher effective post-tax return on property purchase.
 This is expected to spur higher investments in the housing sector, at a time when developers are reeling under tremendous stress to push their inventory and generate sufficient cash flows for business sustenance.

  1. REITs for long-term capital gains:

 The success of two listed REITs has opened up a new avenue for retail investors.
 Since REIT units are similar to listed shares, the capital gains tax treatment should be aligned by reducing the holding period from three years to one year improving liquidity and increasing retail participation.

  1. Allow 100 percent FDI in residential projects:

 Presently, 100 percent FDI is allowed through the automatic route in under-construction residential projects only.
 The move to permit FDI in completed residential projects will aid in unlocking the capital held up in unsold inventory, thereby rescuing cash-strapped developers. This is likely to lay a foundation for institutionally owned residential housing assets in India.

  1. Allow input tax credit to developers:

 The government has reduced the GST burden by rationalizing the effective rate on residential housing projects.
 But the unavailability of Input Tax Credit (ITC) to developers has resulted in the minimal reduction in prices to the home buyers, largely offsetting the GST reduction measure.
 If the ITC is restored it can help developers to pass on the tax benefit to homebuyers.
 Similarly, ITC should be allowed on the development of commercial real estate properties meant for leasing purposes.
 As per Section 17(5) of the Central Goods and Services Tax Act, the input tax credit is not allowed to be claimed on the GST payable on rental income.
 The disallowance of ITC has thus led to higher cost of construction, blockage of working capital and adversely impacting cash flows of developers.

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