Rationalization of taxes that alleviate the tax burden on the real estate sector and providing much-needed liquidity that can boost consumer demand would be a welcome move in Budget 2019-20.
Union Budget 2019: With the first full budget of the second term of the NDA Government on the anvil, all industry bodies are harboring their own set of expectations of the new Finance Minister. The real estate industry is no exception. Rationalization of taxes that alleviate tax burden on the sector and providing much needed liquidity that can boost consumer demand would be a welcome move. Some of the initiatives that could be considered by the new Finance Minister are summarized below:
Subsuming of stamp duty in the Goods and Services Tax (GST) regime
Presently, stamp duty is payable on documents (such as agreement to acquire property) as per the provisions of the respective stamp duty laws of the respective states. This contributes substantial revenue generation source for the state governments, whereas, GST is a central levy from which a share is given to the state governments. As these two levies are payable under different regimes, stamp duty paid on agreements for under construction properties becomes an additional levy payable over and above the GST paid. Subsuming stamp duty within the GST regime could help alleviate this burden on under construction property buyers and bring some parity with buyers that purchase constructed property (who have to pay only stamp duty presently).
Relaxation of housing loss set-off restrictions
Finance Act, 2017 introduced a restriction of Rs 2 Lakh on the amount of house property loss that can be set off against other sources of income. The limit of Rs 2 Lakh is a dampener to home buyers (particularly in urban areas) who typically incur interest costs far in excess of this limit. Accordingly, to boost demand, the Government should consider enhancing this limit to Rs 5 Lakh or completely abolishing the same.
Extension of tax holidays for affordable housing
Finance Act, 2016 introduced certain benefits for encouraging affordable housing projects, i.e. projects with carpet area not exceeding 30 sq. mt. in metros and 60 sq. mt. in other locations. However, the benefits presently are available only for projects approved up to 31 March 2019. Given that the Government plans to provide housing for the urban poor under the Pradhan Mantri Awas Yojana, which has a target of building 20 million affordable houses by 31 March 2022, the benefits for affordable housing should be extended.
Relaxation / removal of MAT
The full impact of tax holiday provisions is dampened by the impact of Minimum Alternate Tax (MAT) which is currently payable at 21.55 per cent. There have been repeated demands from industry bodies to abolish MAT for specific sectors / industries. While the Finance Ministers in the past have resisted such demands, now it may possibly be time to abolish or introduce a phasing out process for MAT.
Measures to increase liquidity
The Real Estate industry was particularly affected by the recent liquidity crunch, which contributed to the stagnation of the sector on account of illiquidity. The Government has been encouraged by industry bodies and leading figures to address this poignant issue by ensuring there is adequate liquidity in the system. Globally, liquidity in the Real Estate Industry has also been provided by sophisticated entities and high net worth individuals by participation in Real Estate Investment Trusts (REITs).
Introduced in 2014, as an alternative to Venture Capital and Private Equity Funds, REITs have failed to take off with only two REITs registered to date. In contrast Alternative Investment Funds (AIFs) registered under the new regime in place from 2012 are in excess of 550 (of which around 300 plus are category II AIFs – a preferred structure by foreign investors investing in real estate). Of the two registered REITs only one has completed its public offering of units. This is the key difference between an AIF on one hand, which pools private capital, and REITs that are mandatorily required to make a public offer.
Relaxing this requirement may enable REITs to attract private capital and provide additional liquidity to the sector that is striving for the same.
While the Securities Exchange Board of India (SEBI) has proposed a relaxation (vide a consultation paper) in the mandatory listing condition for Infrastructure Investment Trusts (InvITs), there has been no such suggestions for REITs. Given the liquidity requirements of the Sector, the Government could relax this condition for REITs as well.
While affordable housing has been granted infrastructure status, the Government may consider granting the such status to the entire real estate sector. Infrastructure status will benefit the industry by way of lower borrowing rates, increased flow of foreign and private capital, etc.
India’s real estate sector has traditionally been a significant contributor to India’s GDP and is poised for strong growth. Reformatory measures such as SEBI’s REIT guidelines, Government’s Housing for All Mission, the Real Estate (Regulation and Development) Act, Benami Transactions (Prohibition) Amendment Act and progressive relaxation in FDI norms are steps in the right direction; the sector desperately needs impetus in the form of rationalization of taxes, expeditious approval process, and an injection of liquidity to help it achieve its full potential.
(By Punit Shah, Partner, and Venkatraman Iyer, Principal, Dhruva Advisors LLP)