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  1. Here’s why realty is higher in criticality than manufacturing

Here’s why realty is higher in criticality than manufacturing

Two recent developments in the real estate sector have the potential to kick-start this vital sector which has been in the doldrums for some time.

By: | New Delhi | Updated: October 11, 2016 7:58 AM
The real state of real estate is more complex and several other hurdles must be removed before construction can become an engine for growth. (Reuters) The real state of real estate is more complex and several other hurdles must be removed before construction can become an engine for growth. (Reuters)

Two recent developments in the real estate sector have the potential to kick-start this vital sector which has been in the doldrums for some time. One is the decision to release Rs 1 lakh crore caught up in a tangle of conflicts between the government and the construction industry, to infuse liquidity in the system and the other is the real estate regulatory bill to minimise litigations between builders and buyers. Although these should address the major concerns, these are just the basic necessities.

The real state of real estate is more complex and several other hurdles must be removed before construction can become an engine for growth.

To begin with, some crucial tax laws are either ambiguous or unjust. An example is the applicability of capital gains tax to a seller who intends to offer a plot for development and sale. While the builder will compensate the seller over a period as he progresses with the construction and sale, the seller has to pay capital gains tax the moment the property is handed over to the builder according to the amendments to section 2 (47) of the IT act. Moreover, sellers may not eventually receive part or the entire consideration due to litigations or acts of omissions and commissions of the builder.

Laws must be amended so that capital gains tax occurs only during actual transfer of property through registration. In case of redevelopment of properties, as a routine, builders provide alternative accommodation for tenants during the construction stage and this was deemed taxable till now. Only recently the tax tribunal has clarified that accommodation provided can be treated as capital receipts and is, hence, not taxable as revenue.

There are numerous instances where one or two owners in a multi-owner tenement stymie the efforts by the majority to redevelop the property and many of these involve buildings in a precarious state. Also, remedial measures are ineffective to tackle the odd and obtuse tenant or owner in a housing society who defaults on payment of even basic charges. Can we arm societies with rigorous legislations to deal decisively with delinquents and end the tyranny of the minority?

Chaotic urban (non) planning has promoted haphazard developments, with attendant hassles such as congestion, lack of civic infrastructure and aesthetics. The fact that at the current rate of sale, the existing inventory of real estate is sufficient for the next three years shows the mismatch between acute demand on one side and buyer’s perceptions of value on the other. Apart from dampening buyer enthusiasm, such random developments have side effects as well. Entities as diverse as luxury hotels and laundries, bungalows and bakeries and slums and sky scrapers are located cheek by jowl with adverse effects on valuations and revenue potential. With Ambani and aam aadmi as neighbours, guideline value for registrations or for property tax will ensure that either it is pocket change for the former or it is way beyond the latter. Other than a few cities where some traces are visible, the concept of real estate zones for various strata of society and activity is absent.

Legislations must be brought to ensure orderliness from now on and for correction of existing distortions over a period of time.

To make real estate affordable, the government must improve infrastructure in remote areas and smaller towns, to disperse activity and temper land costs. Sand is a vexatious issue across the country due to environmental considerations. Perhaps, imports should be explored.

Beyond these of course are the familiar malignant factors such as the black hole of corruption, lack of transparency and the like. Why does it take months or years to get plan permission even for a squeaky clean project? Witness how the Karnataka government has whipped out some obscure plan of decades yore to mow down middle class housing, built after due permissions and taxes while sparing some others on opaque grounds. Despite the awesome power of Information technology to economically bridge sellers and buyers, the entrenched 2-4% brokerage practice belies the claim of acute distress by the industry.

There are many stake holders untouched by the two major reforms mentioned at the start. To make a breakthrough, on the lines of GST, the central government must marshal builders and buyers along with the others such as banks, income-tax, state governments, panchayats, the legal fraternity and construction material suppliers to bring out a comprehensive package of reforms. The industry has the potential to absorb displaced unskilled farm labour and is, hence, a notch higher in criticality than manufacturing. Without a comprehensive plan under a regulatory authority to address all the infirmities, just hurling cash will be like building the odd grandiose flyover in the city. The bottleneck will shift to the next signal.

The author is a retired executive. Views are personal

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