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How govt can revive the realty sector written by Neeraj Bansal, published in Hindustan Times. January 1, 2017

The year 2016 was a mixed bag for the Indian real estate sector. The commercial sector was at an all-time high (43 million square feet) leasing of Grade A office space. On the contrary, there was 9% decline in residential sales on year-on-year (y-o-y) basis. Demonetisation has impacted the revival in the residential segment which was observed in the first three quarters of 2016. This resulted in 2016 recording the lowest residential sales of about 244,700 units after 2009 .

 

A number of issues are restricting the sector&rsquos growth. Some of them include: prolonged demand slowdown in residential segment, liquidity crunch, limited options available with developers for long-term funding, and complex tax structures.

 

Though, we acknowledge and welcome the steps by the Centre, the property market is in dire need of an impetus which is expected through the Union Budget 2017-18. Here are some suggestions and their likely impact.

 

Expectation: Suitable amendments should be brought to exempt capital gains, if any, arising on the transfer of immovable property by the owner thereof to Real Estate Investment Trusts (REITs).

 

Further, capital gains earned by REIT from sale of property or shares of REIT SPV, should also be exempted from taxation in the hands of REIT. Also, the threshold period of 36 months for REIT units to qualify as long-term capital asset should be reduced to 12 months.

 

Likely impact: This step is likely to make REITs an attractive proposition for both the developers and REIT unit holders. India has over 325 million square feet (msf) of ready REITable commercial stock (office and retail) across top seven cities, which is estimated to be valued at about Rs 3,700-Rs 4,050 billion. A lower threshold for long-term capital asset will augur liquidity and encourage investors.

 

Expectation: Transactions of land or development rights therein should be excluded from the gamut of Goods and Services Tax (GST). Also, there has to be clarity on whether credit would be available to either the contractor or the developer engaged in construction of immovable properties.

 

Further, the rate of GST for the under-construction property must be 12% (with CENVAT credit) and 5% for the under-construction Affordable Housing projects.

 

Likely impact: The proposed measures are likely to reduce the overall cost of the projects, thereby increasing the affordability of homebuyers.

 

Expectation: Create a policy framework to allow state housing authorities to distribute tax credits to developers for affordable housing projects. These credits can then be purchased by investors at market determined prices.

 

Likely impact: The sale of tax credits can generate capital for such developers. For instance, the Low Income Housing Tax Credit programme in the US is the largest source of financing for developers having affordable rental-housing projects. These credits have financed over 2.9 million affordable rental-housing units in the US since such credits were launched in 1986.

 

Expectation: Uncertainty in tax position and also multiple levy of taxes involving Joint Development Arrangements (JDAs) ultimately inflate the price of the residential unit for the homebuyer. It is recommended that appropriate guidelines be issued on the tax treatment of JDAs.

 

Likely impact: Land acquisition cost accounts for one of the major components of the overall project cost, which varies from 30%-60% depending on the project&rsquos location. This move is expected to boost JDA models which may lead to leaner balance sheets of the developers.

 

Expectation: The implementation of MAT has drastically reduced the development of Special Economic Zones (SEZs) over the past few years, resulting in a significant impact on overall economic development. Hence, the government should consider scrapping MAT currently being levied on SEZ units and developers, to again revive the interest of developers in developing SEZs. Further, MAT exemption should also be granted to the affordable housing projects.

 

Likely impact: This may help the government in providing impetus to the mega initiatives, such as &lsquoMake in India&rsquo, &lsquoHousing for all by 2022&rsquo and also make exports competitive.

 

Expectation: The government should consider the demand of granting infrastructure status to the housing sector under section 80-IA or under section 35AD of the Income Tax Act, especially to integrated township projects.

 

Likely impact: Granting an infrastructure status may help reduce the risk-weightage assigned to the sector by RBI. It is expected to enable the developers to raise funds at comparatively cheaper cost and improve liquidity. This can revive the projects which are stalled due to liquidity crunch.

 

Expectation: The government should allow real estate developers, to raise funds through External Commercial Borrowings (ECB) route for affordable housing segments and other segments as well.

 

Likely impact: This can reduce the borrowing cost of developers significantly compared to borrowing domestically. This would in turn lower the project cost which can ultimately make the housing units affordable.

 

Expectation: The real estate sector has been grappling with liquidity issues and piling debt levels. The total outstanding debt of listed real estate developers in India has risen from Rs 25,000 crore in fiscal year FY07 to over Rs 83,000 crore in FY16. As a result, higher tax outgo and dwindling residential sales have further worsened the liquidity situation. Hence, it has become essential to bailout the sector by restructuring existing project loans.

 

Likely impact: This move is expected to improve liquidity situation which can enable completion of the projects which are stuck due to liquidity crunch.

 

Expectation: Increase the deduction limit under section 80C of the Income-tax Act. The government must consider raising the deduction limit from Rs 1.5 lakh to Rs 5 lakh under section 80C of the Income Tax Act, from annual income on consolidated payments or deposits specified in sub-section (2). Alternatively, deduction may be allowed in relation to principal repayment up to Rs 10 lakh (spread over a period of five years)

 

Increase the deduction limit on interest on home loans under section 24 (b).It is suggested that the deduction on account of interest payment available under section 24 of the Income Tax Act be made applicable from the year in which the loan was taken, as for the principal under section 80C of the Income Tax Act, primarily to the first time homebuyer. Since majority of the housing units in metros and tier-I cities cost over Rs 50 lakh, the government should look at raising the limit for deduction on interest payments from current Rs 2 lakh, for owner occupied houses.

 

Likely impact: As sub section (2) of Section 24 caters to payments on account of various necessary savings such as pension fund, provident fund, insurance etc., hence, raising the deduction limit would allow a home buyer to accommodate payments of principal amount borrowed for purchase or construction of a house. The move is expected to boost the housing demand, owing to an expected improvement in affordability.

 

(The author is partner and head, building construction and real estate, KPMG in India.)