Budget 2020: Liquidity crunch, unsustainable debt levels paralyse real estate sector; industry seeks sops for revival

  • Both local as well as global stakeholders of this sector are keenly watching the moves of the policymakers and are hoping for a favourable policy and tax measures to be announced by the government

  • Given the sector contributes to around 8 percent of the total GDP of the country, it is vital that urgent measures be taken by the government to revive the sector

  • Personal tax rates should be lowered to ensure there is higher disposable income in the hands of consumers

In light of the slowdown in the Indian economy and record inflation since July 2014, all eyes are eagerly set on the Union Budget 2020-21, which will be presented by Finance Minister Nirmala Sitharaman on 1 February 2020.

The real estate sector is paralysed with very high levels of unsold inventory across micro-markets, liquidity crunch, unsustainable debt levels and negative perception from investors, customers and policymakers. Both local as well as global stakeholders of this sector are keenly watching the moves of the policymakers and are hoping for a favourable policy and tax measures to be announced by the government. Given the sector contributes to around 8 percent of the total GDP of the country, it is vital that urgent measures be taken by the government to revive the sector.

While during the recent past, the government has announced big-ticket reforms in the form of setting up of Rs 25,000 crore Alternate Investment Fund for reviving stressed assets, minimum guaranteed employment, providing a boost to affordable housing, etc., the actual benefit from the implementation of these measures is yet to be seen.

 Budget 2020: Liquidity crunch, unsustainable debt levels paralyse real estate sector; industry seeks sops for revival

Representational image. AFP

This sector has a huge cascading impact and its revival could provide a boost to the sagging economy and therefore it is crucial that the government should focus on taking measures aimed at stimulating demand in the sector. Some of the key reforms which could be considered by the government to provide an impetus to the sector:

Consumption: This is driven by disposal income in the hands of the consumers. While the government has proposed a lower tax rate of 25 percent for domestic companies, the personal tax rates should be lowered to ensure there is higher disposable income in the hands of consumers.

Roti, Kapda aur Makaan: This continues to be a dream for the aam aadmi in India. To incentivise and help every Indian achieve this dream, the existing limit of tax benefit on the deduction of interest payment of Rs 2 lakh on home loans should be significantly relaxed.

Reduction in GST rates: Recently, the government provided for a reduction in GST rates from 12 percent to 5 percent (without providing for input tax credit benefit (ITC)) for real estate developers. The ITC benefit should be available to real estate developers as this would lead to a reduction in acquisition cost for the final consumers and consequently, would make residential properties more attractive and affordable from a pricing perspective. Further, ITC on commercial projects should also be available to the lessor which could lower the costs of operating a commercial asset.

Bold fiscal measures needed: The real estate sector is capital-intensive. The sector is facing serious liquidity issues and needs bold fiscal measures for its resurrection. The government should focus on easing/restructuring the current norms for banks/NBFCs for providing loans to the debt-laden sector

Industry status for the sector: This has been a long-standing demand. While the government accorded industry status to the affordable housing segment in 2018, builders and developers feel it should be extended to the entire sector to ensure it can get access to funding at lower rates and reduce the cost of capital

Rationalise direct tax provisions: The concept of business trusts was introduced by the government to provide ability to developers to raise funds and attract foreign investors as it provides a beneficial tax regime. However, the tax provisions are still not consistent with the intent of the regulations because of which there is a lack of interest by the developers in adopting business trusts. Thus, the government should rationalize the direct tax provisions to meet the long pending demand of industry players

(The writer is Tax Partner-Real Estate practice, EY India)

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Updated Date: Jan 24, 2020 13:29:57 IST