Here are a few aspects that require consideration by the government in the Union Budget 2019 to revive the real estate industry.
The real estate sector has witnessed ceaseless headwinds since 2016, each year causing weakened demand and resulting in rising unsold inventory and lower absorption capacity of home buyers. 2018 was just tip of the iceberg with systemic failure of some large financial institutions impacting the NBFCs, resulting in developers facing the heat of liquidity crunch with receivable cycles deferred invariably with no clarity even against the units sold with part disbursements received prior to the NBFC crisis. Despite no fault of developers, the real estate continues to be beaten down due to financial turmoil in the economy and yet the developers are walking along a tight rope and continuing to construct despite of dried up sales, high receivable cycles and unavailability of credit from Banks/Financial Institutions, just so as to match the RERA timeline and deliver homes to buyers. It is imperative for the government to revive this industry as it is one of the highest contributors to GDP and job creation. To achieve the government’s vision of housing for all by 2022, the government has to incentivise real estate developers by lowering tax burden on end buyers, thus increasing dispensable income as well as relaxing provisions for developers under various implemented schemes & making construction finance available for the developers to complete projects within timelines submitted to RERA.
Stamp duty should be brought under the GST purview as all the other state taxes are abolished and input tax credit should be granted for the same. Keeping stamp duty out of the GST purview results in cascading effect on buyers impacting their buying decision at large. As the land value varies from one location to another, there should be rationalization in abatement. For example, currently it’s at 33% for all over India. While in Mumbai and NCR where the land costs are higher, the abatement should be 50% or higher.
A few aspects that require consideration by the government to revive the real estate industry are as follows:
Revision in tax slab rate: The government should relook at income tax exemption limits. It should be revised upwards from Rs 2.5 lakh per annum to Rs 6 lakh per annum to match their own definition and only taxing Middle Income Group (MIG) and higher income households. This is imperative to provide higher disposable income to the Economically Weaker Sections (EWS) with annual household income of up to Rs 3 lakh and those under the Low Income Group (LIG) with annual household income between Rs 3.01 lakh and Rs 6 lakh which are the ideal target group as it will help the government realise their housing for all initiative by 2022.
Revision of loan limits under PMAY: Under the PMAY scheme the government should raise the maximum loan eligibility for interest subsidy to at least Rs 9 lakh for LIG from Rs 6 lakh applied to both the sections. This should be amended specially in case of Metro & Tier I cities where affordability is an overall challenge and minimum Ready Reckoner rates implying the prices of Rs 2,000 per sq.ft translates into minimum house value of Rs 10 lakh or more for even ‘One Room Kitchen’ configurations with carpet areas of less than 20 sq.mt.
Extension of CLSS beyond March 2020 and increase in limit on loan-eligibility for MIG: Under the CLSS, the MIG beneficiaries with an annual income of above Rs 6 lakh and up to Rs 12 lakh would get an interest subsidy of four per cent on a 20-year loan component of Rs 9 lakh up to March 2020. Those with an annual income exceeding Rs 12 lakh and up to Rs 18 lakh would get interest subsidy of 3 per cent. Realistically, the MIG-I & MIG-II are the real home buyers especially based out of metros, Tier-I & Tier II cities where the starting value of homes with carpet area of around 30 30 sq.mt are at least Rs 15 lakh and going up to Rs 60 lakh depending upon the area and location. Considering the nature of home loans sanctioned against property with LTV of MAX 80%, for a buyer of Rs 15 lakh home, he/she has to have Rs 3 lakh of equity and Rs 2 lakh for GST & Stamp duty as his/her savings and balance of Rs 12 lakh can be financed by home loan. Thus, the cap of Rs 9 lakh doesn’t match the real scenario and this limit of loan eligibility should be raised higher and should be mapped more realistically considering both MIG I & MIG II category separately.
Modification in Deductions under section 24 and 80EEE: The deduction for principal as well as extent of full interest paid should be there with no cap of Rs 2 lakh only, at least for the first property, as ideally the buyer pays maximum interest component as part of amortisation for a tenure of 20 years loan. Thus, the period of five years counted from time of borrowing for deduction should be extended further if not dispensed, as the principal amount is barely retired to the tune of max 12% of borrowed amount in that window and interest burden continues to remains very high. Approximately only 25% of principal amount is repaid by 10th year and 50% by 15th year. Considering again MIG I & MIG II with loan requirements of up to Rs 50 lakh, the interest component can be as high as Rs 5 lakh in the first year itself, resulting in tax inefficiency and leaving the purpose of 80EEE invalid.
Reviewing GST rates applied for property buyers: The affordability of buyers have been reduced post implementation of GST at higher rates vis-a-vis service tax with 70% abatement because the tax incidence has increased suddenly by 6.5% which is a steep rise and total tax incidence reaching as high as 18% with 12% GST and 6% stamp duty. Though the input credit mechanism ensures anti-profiteering and rebate to be eventually passed to buyers, this has impacted demand for under construction properties resulting in higher unsold inventories. In addition, the real estate developers have to complete projects under stipulated timeline submitted to RERA whereas high tax incidences have dented demand from end users.
Reviewing provisions under Section 80-IBA: It was a welcome move last budget where by definition of area which was built up of 30 sq.mt or less in cites was changed to carpet area. However, realistically the same is a size of rehab units prescribed by SRA authorities for tenants and PAP. Considering the MIG I & MIG II sections, this number should be revised higher by at least 10 sq.mt to benefit the actual demand and realise the purpose for housing for all.
(By Parth Mehta, MD, Paradigm Realty)