Budget 2019: Govt should instruct banks to allocate part of new disbursements for critical needs of real estate sector

  • GST rate cut to 18 percent from the current 28 percent would drop the cost of construction and make housing a little more affordable

  • In order to take the government’s objective of “Housing for All” even further, income threshold limit could be further relaxed especially in major towns

  • The NBFC crisis, which began in September 2018, is still to dissipate and most of the NBFCs have gone very slow or stopped new disbursals

There are expectations that the incumbent government will try and set right some imbalances that the real estate industry faces at present.

The real estate industry is one of the largest contributors to both Gross Domestic Product (GDP) and employment, and has been facing one of its toughest periods in the past couple of years. There have been structural, market-linked as well as regulatory issues, and there are natural expectations that some of these  will be addressed with a little tinkering as follows:

1) Goods and Services Tax (GST) on under-construction development

 Budget 2019:  Govt should instruct banks to allocate part of new disbursements for critical needs of real estate sector

Representational image. Reuters.

Currently, GST is levied at 12 percent on payments made for under-construction property or ready-to-move-in flats (where completion certificate has not yet been obtained at the time of sale).

However, full input tax credit allowed (no refund in case of overflow), which effectively means an incidence of 5 percent-6 percent with input tax credit adjusted.

There are rumours that the GST may be cut to 5 percent, but with no input tax credit allowed.

From a developer perspective, this would effectively mean a scenario, which is no different from what exists today.

Passing on any benefit to home buyers would depend on whether the developer would be ready to absorb the cost. It may make more sense to rationalise the GST to 8 percent, but leave adjustment of an input tax credit as the prices can clearly reduce and the benefits should surely be passed on.

2) GST on cement

Cement currently attracts a GST of 28 percent (at the level of sin tax). Cement is clearly not a sin or a luxury. It is the core of real estate development and accounts for a fifth of the construction cost. While a GST rate cut to 18 percent from the current 28 percent would cut revenues to the exchequer by approximately Rs 10,000 crore and would drop the cost of construction, thus making housing a little more affordable. It would also spur infrastructure projects, which are amongst the biggest users of cement.

3) Increase the threshold of PMAY

The Pradhan Mantri Awaas Yojana (PMAY) has been a great success and has benefited a lot many first time home buyers. The government has already increased the income threshold limit from Rs 6 lakh to Rs 18 lakh and the size of dwelling units from 60 sq metre to 200 sq metre. In order to take the government’s objective of “Housing for All” even further, these could be further relaxed especially in major towns to induce more and more people to own a home rather than rent one.

4) Funding for real estate industry

Funding (or rather lack of) is a real concern for the real estate industry. In the past five years, the share of banks in addressing the funding needs of the real estate industry has been going down with most of the demand being catered to by the housing finance companies (HFC) and non-banking finance companies (NBFCs).

The NBFC crisis, which began in September 2018 is still to dissipate and most of the NBFCs have gone very slow or stopped new disbursals – some are struggling to disburse sanctioned loans. This has hit the real estate industry very hard. With buyers wanting to wait for completion to take advantage of the GST-free dwellings, developers are struggling as they have negligible cash flows from new sales and do not have support from the lenders.

The government has to instruct banks to allocate a certain percentage of new disbursements to cater to the critical needs of the real estate sector since the survival of many developers is at stake. Along with that, it would also impact the delivery of projects and employment. Some directions on this front will be a much-needed respite to the industry.

(The writer is national director, Capital Markets and Investment Services at Colliers International India)

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Updated Date: Jan 30, 2019 12:31:03 IST