Budget 2018: The Indian real estate is going through a transformative phase on the back of reformative steps taken by the government over the past 3 years. Some of the reasons have been demonetization, pricing mismatch, GST and advent of RERA. The real estate market has been under severe stress and is in the grip of cyclical doldrums where supply is ample, while the offload is subdued. This situation has hit developers severely. Many developers are in severe cash crunch and unable to service high cost of debt. The government has been under pressure with rising unemployment levels and there is a constant need to provide new employment avenues to India’s growing working population. The real estate sector being the second largest employer after agriculture can absorb a substantial chunk of this.
Going into the Union Budget 2018, the real estate sector had high expectations. The anticipation was that FM Arun Jaitley will continue from where he left in the Union Budget 2017. The only significant amendment for the real estate sector has been rationalization of stamp duty value adopted for transactions in immovable property. There are various sections in the Income Tax Act, 1961 which provide for adoption of stamp duty value in case of transfer of land or building or both. This has led to issues especially in case of distressed sale of real estate assets.
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Due to the stress that the real estate industry is currently going through, there are lots of transactions where the consideration may be below the stamp duty value. This is purely on account of genuine business cases without any intention to avoid tax. Substitution of stamp duty value in such transactions is creating unnecessary hardship for parties to consummate the transaction. Acknowledging the hardship, the Union Budget 2018 has proposed that no adjustment shall be made in the transaction value where the stamp duty circle rate does not exceed by more than 5% of the transaction value. The 5% number is not significant enough and may not address the difficulty faced in the transaction. Nevertheless, it is a welcome amendment and should give some fillip to transactions on the borderline.
Further, in line with the government’s aim to provide housing for all by 2022, the Union Budget has proposed to set up an affordable housing fund under the National Housing Bank. Further, last week GST Council recommended rationalization of GST rates under which GST would be charged at 8% on under-construction properties, which would be 4 percentage points less than the earlier effective rate of 12%. These moves should provide resilience to the affordable housing sector.
REIT in India is yet to take off. REIT becoming a reality could have significant positive impact for the sector and for the economy as a whole. There was expectation that the holding period for long-term capital gains for REITs would be reduced from the existing three years to one year, on par with equity investment. This would have made investing in REITs more attractive to investors.
The Budget 2018 seems to be a damper for the real estate sector, excluding the affordable housing segment.
(By Hemal Mehta, Partner, Deloitte India, and Rishabh Jain, Manager, Deloitte Haskins and Sells LLP)