The Union Budget for 2019 – 2020 will be presented by the first female minister of finance Nirmala Sitharaman on 5th July 2019. The public at large is expecting a progressive proposal from this government to revive the economy and create positive business sentiments.
Real Estate being the backbone of the economy, and the industry expects positive measures from the government to revive the sector in addition to the steps already taken by the government in the Interim Budget published on 1st February 2019. In view of the upcoming Budget, it would be interesting to take note of the tax incentives granted so far to the sector, and also analyse various additional incentives which the sector expects from the government.
Pursuant to the tax incentives to the sector proposed in the Interim Budget, amendments have been incorporated in the Finance Act, 2019 notified on 21st February 2019, and made effective from 1st April 2020. Tax on notional rent on a second self-occupied house has been exempted. No capital gains tax will be levied on investment of long term capital gains of up to ₹2 crore in two residential houses. Period of tax exemption on notional rent from unsold inventories has been extended from one year to two years. Tax holiday available to the promoters of affordable housing has been extended to housing projects approved till 31st March 2020.
To further boost the sector,the Goods and Service Tax (GST) Council in its 33rd meeting held in February granted reduction in GST rates on under-construction houses from 12% with Input Tax Credit (ITC) to 5% without ITC and for affordable housing from 8% with ITC to 1% without ITC. The GST Council also granted exemption of intermediate tax on TDR, Joint Development Agreements (JDAs), long-term lease (premium) and Floor Space Index (FSI) on residential projects, subject to certain terms and conditions therein.
In addition to the above measures, the government has also assigned Social and Commercial Infrastructure status to affordable housing projects.
Thus, the government has made remarkable progress in accelerating the growth of the sector, however, stakeholders believe this may not be sufficient to weed out the sector out of this slump and are expecting the government to consider more such incentives and exemptions in this Budget.
As far as GST is concerned, promoters expect the government to consider reinstating ITC on GST on under construction residential projects and affordable housing and GST rates as decided by the 33rd GST Council may be made applicable for at least a period of two financial years. This may help address the cash flow issue and reduce the burden of high cost being passed on by promoters to home buyers. Since, commercial real estate is also an important contributor to the economy, the Government may consider applying similar GST rates as applicable to residential project.
The government may also consider extending tax holidays provided to affordable housing to redevelopment projects of slums and housing societies comprising of dilapidated buildings especially in a city like Mumbai where there is scarcity of vacant land. This will help incentivise the promoter to redevelop and at the same time help the objective of the government to achieve housing for all by 2022. With respect to affordable housing, the value of units constructed under the affordable housing scheme as prescribed under the Income Tax Act, 1961 (Income Tax Act) should be increased in metropolitan cities like Mumbai, New Delhi, NCR, etc. in order to provide the income tax benefits to units of higher value. Considering that tax exemption on notional rent has been extended to two self-occupied houses, the deduction limit of interest paid on residential property which has been capped at ₹2 lakh may also be considered to be raised.
There has been a drastic fall in the development of SEZ projects in recent times. In order to boost the sector, the government may consider abolishing Minimum Alternate Tax under Section 115JC of the Income Tax Act. Tax incentives may also be made available to new asset classes such as warehousing and logistics,co-working spaces, hospitality, shopping centres, business parks etc. Infrastructure status granted to affordable housing may also be extended to the entire sector for various reasons including lower borrowing rates and tax concessions.
The government may also consider measures to implement the Urban Rental Housing Policy, which has been awaiting implementation since October 2015. This will incentivise rental housing and empower the state governments to provide various tax incentives such as exemption of stamp duty and property tax for predefined period.
Last but not the least, since the sector is facing severe liquidity crunch, especially NBFCs, the government should take proactive measures to create sufficient liquidity in the sector.
The above measures, if implemented, would go a long way in reviving the sector by taking bold steps with respect to resolving liquidity crisis, provide tax incentives to stakeholders and relaxations of historical norms adopted. The government can pave the road for a progressive sector and in turn the sector can help the government achieve their manifesto of “Housing for all by 2022”.
Views are personal. Abhishek Sharma is partner and co-head – Real Estate, and Amit H Wadhwani is director – Real Estate, Cyril Amarchand Mangaldas.