Financial year 2017-2018 was expected to be a year of recovery and consolidation for the real estate sector. Recovery and consolidation, from the after effects of demonetisation and more importantly stabilisation from game-changing regulations in the form of Goods and Services Tax (GST) law and the Real Estate (Regulation & Development) Act (RERA).
While the sector overall had just about begun to show offshoots of revival, the liquidity crunch post the non-performing asset (NPA) crisis that hit banks and the non-banking finance companies (NBFCs) during the third quarter once again began to pose serious threats to the fragile process of recovery and in some cases became an existential threat.
As we head into an election year, the next few months are going to be challenging as transactions tend to slow down across the sector. While the government is trying stopgap measures to curtail the liquidity situation, the sector is definitely looking forward to supportive budget announcements.
Given the backdrop, the biggest task of the sector would be to include reforms to enhance government funding as well as private investment in the sector. Measures to increase capitalisation of banks and NBFCs and directives to ease funding to the sector, to both developers as well as retail borrowers, will be critical for the overall real estate ecosystem to function efficiently.
On the policy front, the sector would expect continued thrust on making the Pradhan Mantri Awas Yojana (PMAY), the government’s mega housing mission 2022, a success. Budget allocations towards government-backed housing and funding programmes, both at the institutional and at the consumer level, would need to be commensurate with the policy objectives.
Thus far, the sector has immensely benefitted from the implementation of this policy and in particular, the affordable housing segment which continues to be in the limelight. Additional sops as part of the policy in the form of GST exemptions could definitely keep the momentum going in this space.
In terms of tax reforms, the biggest task of the sector is to rationalise incentives to individual homebuyers to rekindle demand and help developers liquidate their inventory of completed homes, which continue to be at abnormal levels. Enhancing home loan interest deduction threshold from the existing limit of Rs 2 lakh should be definitely considered, particularly because this limit now acts as the cap on the deduction being claimed by home loan borrowers across all properties. Also, increasing the exemption limit for individuals would also help create investible surplus and help individuals afford equated monthly installments (EMIs) to propel new home purchases.
From a real estate developer’s perspective, increasing the scope of affordable housing projects qualifying for the tax holiday would make it more attractive for new project investments. The existing lower withholding tax regime on corporate borrowings in the form of bonds and external commercial borrowings (ECBs) has a sunset clause of March 2020. Extending this sunset in this budget will provide certainty and clarity to foreign investors contemplating investments under this regime.
Another important change that the industry, which comprises developers of Special Economic Zones (SEZs), is expecting is the extension of the tax holiday sunset clause for units operating in an SEZ. The extension of the sunset clause will definitely boost demand for both SEZ offices and drive fresh SEZ investments.
This amendment will be key to the overall SEZ policy revival plan which has been on the government’s agenda for a while now. In fact the recommendations of the recent special committee report on this subject also advocates the use of SEZ as engines for achieving economic growth by boosting employment, and IT/ITeS SEZs happen to be significant contributors to employment growth.
Separately, two other tax issues, which have been hounding the real estate fraternity, pertain to taxation of joint development contracts and characterisation of income from commercial properties developed and leased. The industry would benefit if there is clarity provided on these issues by way of appropriate amendments or clarifications.
Developers who are looking at setting up Real Estate Investment Trusts (REITs) are also expecting that the budget will seal some of the gaps in the tax law that are not conducive. The current law does not provide for exemption from dividend distribution tax (DDT) in a multi-level property holding structure under a REIT, which should be provided to ensure applicability of a single level DDT in a REIT construct. Also, the current law should be amended to provide tax exemption on the transfer of assets by sponsors to the REIT which is crucial if the REIT is contemplating holding of assets directly.
On the GST front, a key issue that has kept the real estate developer fraternity worried is the applicability of GST on joint development arrangements with land owners. This notification has effectively brought land transactions into the GST ambit, thereby increasing the overall development cost in a real estate project. The industry will be eagerly looking forward for a resolution on this issue in this budget.
In summary, the real estate sector is definitely expecting a morale boosting budget largely to help them tide over the prevailing liquidity crunch. Anticipated to be an election-oriented and highly populist budget, the above expectations, especially the policy and tax amendments in relation to boosting housing demand should definitely be considered. Being an election year, the million dollar question, however, is the scope and extent of the budget. A vote on account will certainly not cut it!
(The writer is partner with Deloitte India)
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Updated Date: Jan 25, 2019 11:50:15 IST