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Sunday, March 07, 2021

What can Budget 2021 do for the real estate sector?

Real estate sector has been hit by the pandemic. Homes haven't been delivered. While the pandemic impact will fade, what can the budget do to fix the regulatory mess in the sector?


Updated: January 29, 2021 2:04:05 pm
The prominent colonies are Kud Housing Colony, Davik Housing, Kalu Chak , Swarn Vihar, Tawi Vihar Housing Colony, Swarn Vihar and Peer Bagh Housing Colony. (File)

Written by Mrinal Kumar

Real estate sector is one of the hardest-hit sector by the prolonged lockdown imposed due to the Covid-19 pandemic. Real estate being the second-highest generator of employment and contributing more than 8 per cent to the economy, its revival is one of the key issues that need to be addressed under this year’s budget of 2021-22.

The real estate industry suffered immensely due to the lockdown leading to no construction activities, unavailability of labour and dip in demand and sale of commercial as well as residential properties. Further, to add to the sector’s woes, the extended lockdown led to indefinite migration of labour to their villages, less disposable income with buyers due to increased job losses and expenditure cuts by corporates.

In 2020, we saw the Centre taking some proactive measures to help realty sector such as a six-month moratorium on equated monthly instalments, restructuring of loans of real estate companies, setting up of Special Window for Affordable and Mid-Income Housing (SWAMIH) fund – rescue capital for affordable and mid-income housing projects – along with capital infusion to the National Housing Board. The Reserve Bank of India also announced a massive repo rate cut of 140 basis points over the course of time, leading to lowest home loan interest rates in over 15 years.

However, the real estate sector is still in dire need of an intervention of the Government to overcome the slowdown it has been facing since long. The expectations from 2021-22 budget are high and the industry is awaiting big announcements that not only revive the ailing sector but also alter the future of the real estate sector.

Certain measures have been taken by the Government to bring a boost to the real estate industry so far. Here are certain key recommendations made by the industry to bring reforms to the real estate sector, which are expected to be addressed under the Union budget of 2021-22:

1. As per the recommendations of the industry, to boost the consumption in this sector, the Government should focus on providing more liquidity to the tax payer by raising the ceiling of the rebate on the home loan interest under the IT Act to from Rs 2,00,000 Rs 5,00,000. This can prove to be a helpful measure to attract more and more costumers to invest in properties. In addition, a tax holiday has been also provided by the Government in the last budget on profits to the developer for affordable housing, under which 100% (Hundred per cent) tax deduction under section 80IBA was allowed until March 2021 for affordable housing projects. It is recommended that this tax benefit should be extended by another year.

2. The developers are also hoping for Goods and Services Tax (GST) reforms under 2021’s budget by bringing back the Input Tax Credit (ITC). Currently, GST is to be paid on rental income. While the ITC facility is not provided at the time of its construction, the industry’s demand is of allowing set-off of GST paid on input materials during the construction phase against the GST paid on rent and other income from the property upon completion. The industry currently sees the lack of input credit as a dual tax levy on asset owning commercial real estate developers that rely on leasing or rentals.

Similarly, the GST applicable for commercial properties that are not sold but developed for leasing is at 18% on the rental income, which is an additional burden. This needs to be considered to be lowered or abolished under this year’s budget.

Also, it is expected that there will be cut in GST for under-construction properties, which may help bringing down the cost of construction thus reducing the property prices and raise the demand for the same. Currently, GST rate over the under-construction properties is 5% minus the ITC benefit for premium homes [>Rs 45,00,000/- ] and 1% for affordable homes [<Rs 45,00,000]. Even a limited period waiver on GST will be a supportive move for developers to lessen their burden and in tandem, make prices of the properties economical.

3. Certain states like Maharashtra and Karnataka reduced the stamp duty rates on registration of properties to boost the sluggish real estate sales in the year 2020. The Housing and Urban Affairs Secretary has advised other states to also slash the stamp duty rates in order to revive the demand in the real estate sector. This move shall raise the demand and consumption in real estate sector drastically, as already seen in the state of Maharashtra.

4. According to the real estate sector the status of ‘infrastructure’ has been one of the long-standing demands of the real estate sector. Currently the same has been conferred only to affordable housing which allows it to avail benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital. It is recommended that giving the status of industry to real estate sector as whole including secondary housing and holiday homes will help developers to avail various similar benefits like raising funds at lower costs, being included in the priority lending list of banks. It will help in fundraising for projects from various schemes.

5. In November, 2019, the Government had offered to set up an alternative investment fund (AIF) of Rs 25,000 crore  as stress asset fund to provide relief to the developers for the uncompleted housing projects called Special Window for Affordable and Mid-Income Housing (SWAMIH). This fund aimed at generating cash flow for developers and therefore it needs to be fully utilized as completion of stressed projects will improve homebuyer sentiment and help build the supply side of the industry. The SWAMIH fund was created to give relief to homebuyers of stalled projects and to provide last-mile funding to affordable and middle-income housing projects. These funds need to be continued and more capital is required to be allocated to ensure a larger number of projects.

6. Alternatively, encouraging banks and NBFCs’ to provide liquidity to real-estate projects or take over/restructure unfinished and stalled projects will help in kick-starting the real estate sector and economy at large. The Government’s construction arm, National Building Construction Company (NBCC) took over various Amrapali housing projects for gathering funds for the pending project of the defaulter builder. Similarly, NBCC has taken over unfinished projects of Unitech to complete the construction under stipulated time. These Government’s intervention by allocating certain capital which can be used by NBCC to salvage such abandoned projects could help the homebuyers who were left in lurch and bring back the unfinished projects to market.

7. One of the important move that the Government should consider is further incentivising the private sector to encourage more investment in the affordable housing sector.

The author is a Partner at Shardul Amarchand Mangaldas & Co.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Further, the views in this article are the personal views of the author.

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