Given the political compulsions of heading into elections next year, overall, the Budget focuses on the middle class and is quite populist in nature. The FM was also constrained in meeting the expectations of international rating agencies, banks and financial institutes by trying to rein in the fiscal deficit, while still trying to promote growth through government spending. While realty had outlined a number of demands, deep down most knew the Budget would mainly focus on affordable housing, which was highlighted by the additional housing loan interest deduction, increased allocation for rural housing loans and introduction of funds for urban housing. The introduction of TDS on sales transactions and the reduction in service tax abatement for housing in the non-affordable segment will cause some heartburn.
Overall, the Budget did not meet the expectations from developers, occupiers and investors in the realty as it did not address their concerns on minimum alternate tax and dividend distribution tax on SEZs, recognition as an industry/infrastructure sector, steps to reduce the input costs and encourage more investments in real estate, which is one of the largest employment generators.
However, we expect most of the stakeholders to support the FM?s hopes for economic recovery and growth, which will offset the negatives of last year. An overall boost to the economy through investments in infrastructure, industry, rural and urban development, resulting in a return to GDP growth rates of over 8% in the next few years will have a much stronger impact on the real estate sector.
Meanwhile, the introduction of an additional interest deduction on interest of up to R1 lakh for loans up to R25 lakh bought by first-time buyers is a very welcome move. First-time buyers in the affordable segment are the most vulnerable and, given the high-mortgage interest and inflation rate regime, they needed to be protected and encouraged. This move, along with the 50% rise in funding allocation for rural housing loans and the new allocation for urban housing are measures that will help the affordable housing sector to gather momentum.
Developers can gather strength from this as they will now be assured that there are genuine buyers available. However, they will have to ensure adequate supply within the price range, which is a difficult task as they are faced with problems such as high input costs for land, construction materials, labour and finances. Present opportunities for affordable housing are mainly in tier-2 and 3 cities or on the outskirts of major cities where most established developers do not have much expertise and/or the returns do not justify their interest. There are perhaps opportunities for small, local and new developers to tap into this segment through a focused approach and by building up their scale of operations.
In order to bridge the large fiscal deficit and yet score brownie points with the vast majority of the population, the FM has resorted to taxing the rich by decreasing the service tax abatement by 5% . This will result in pushing up the capital values of under-construction residential properties and affect high-end and luxury markets.
The move to introduce TDS for realty deals is aimed at ensuring that some transparency is brought in. While this is a laudable initiative and will help the government shore up revenues, it will not ensure complete transparency as some sellers may still insist on undervaluing properties in documents to avoid or reduce the quantum of tax they are liable to pay. There may also be a rise in the cost for property buyers as sellers may insist on passing on the burden of the tax to them. Further, this adds to the responsibilities of the buyers as they will have to deduct the tax amount from the seller?s payout and deposit the same with the government.