It won’t be an overstatement to say that the real estate industry forms one of the key pillars of the Indian economy. Estimated to be worth more than $180 billion at present, the sector is projected to reach a market size of $1 trillion by 2030 and contribute around 13% to the national GDP. Over the past few years, however, real estate in India has had to deal with several large-scale policy changes – such as demonetization, the GST implementation, and the RERA Act – that have impacted its growth. The sector was only beginning to bounce back from the impact when the COVID-19 pandemic hit in 2020, completely disrupting the demand and supply value chain.
Almost an year on from that defining moment and 12 months of significant disruptions, uncertainty, and innovation, green shoots of recovery have started to emerge in the Indian real estate industry. The sector posted its best performance in Q3 2020 on the back of the surge in demand for residential real estate, as consumers across the country realized the safety, security, and convenience that comes with owning a property.
Being heavily dependent on the government policies and regular cash flows, the sector constantly requires policy support for its recovery and smooth functioning. With that backdrop, the industry is hopeful that the upcoming Union Budget 2021 will bring cheer to both developers and consumers. Here is what we are expecting from the Budget 2021 that would give fillip to the sector:
Extending the CLSS scheme and incentivizing affordable housing developers
Considering that the pandemic has underscored the value of homeownership, the industry could benefit from incentives that the government provides to new buyers. In particular, extending the deadline for the Pradhan Mantri Awas Yojana’s Credit Linked Subsidy Scheme (CLSS) for the Middle-Income Group (MIG) from March 2021 to March 2022 would be a good step forward. The Economically Weaker Section (EWS) and the Lower Income Group (LIG) have time until March 31, 2022, to avail the CLSS subsidy. By extending the deadline for the MIG buyers as well, the demand for affordable housing in the country could be bolstered.
Incentivizing affordable housing developers in light of the nationwide growth to boost the demand for affordable homes is also an important action item. With the government’s push for Housing for All by 2022 and the Pradhan Mantri Awas Yojana, the affordable housing segment dominated 2020, accounting for 50% new real estate launches. Affordable homes also accounted for almost half of the overall sales in Q3 2020.
In this regard, an expansion in the budget for PMAY could be a big boost for affordable housing developers. The government could also look to extend the tax holiday for developers in the segment by another year; the scheme that provided a 100% tax deduction under section 80IBA is set to expire in March 2021.
Research by international property consultant Knight Frank shows that the country would require 25 million affordable homes by 2030. Focusing on incentivizing buyers and developers in the affordable housing segment could, therefore, be a major step toward achieving the goals of the ‘Pradhan Mantri Awas Yojna – Housing For All’ initiative.
Providing tax concessions on home loans
The government could consider raising the tax rebate on housing loan interest for homebuyers and investors from the current INR 2 lakh to INR 5 lakh. For cities with high housing costs, a stamp duty cut, like the one in effect in Maharashtra until March 2021, could also help drive demand. Furthermore, the removal of taxation on national rental income and better sops for income from rent could drive ‘purchase for investment’ sentiment. This can ignite a virtuous cycle of consumption that can revitalize large-scale economic activity.
These benefits could be especially fruitful when we consider that housing prices, at present, are considerably low. Home loan rates have also seen a steep cut in recent months. An increase in the demand for property will help reduce the burden of backed-up inventories on real estate developers. The revenue they generate in the process will, in turn, boost the development of new or previously unviable projects. Moreover, an improved supply chain could lower property prices and provide a strong impetus to the housing demand-supply ecosystem across the country.
Streamlining the GST
There is also an urgent need to further streamline the Goods and Services Tax, which is applicable at 1% for affordable homes and 5% for other segments. A 1% cap on GST for projects under-construction would aid the quick completion of projects stalled due to financial reasons. The government could take steps to avoid double taxation on rental incomes. Commercial real estate developers, for example, should be allowed to set off the GST paid on construction materials. Improving the credit availability to smaller developers, who continue to face cashflow challenges due to the pandemic is also an area that requires government stimulus.
Currently, developers have to pay GST on various goods and services while constructing a project. They cannot set-off the GST paid against the GST collected on rentals as of now. Therefore, allowing input tax credit to developers, especially those who build to lease, can be a big impetus.
Stamp duty Reduction
Reduction of stamp duty in Maharashtra has reaped good results. If this can be mirrored in other states too, fence-sitters would be quick to take the plunge and this would further boost real estate.
The real estate industry has already benefited from the support provided by recent fiscal and policy interventions by the central and several state governments. But, with the impact of pandemic-induced challenges expected to extend well into the next fiscal year, additional reforms and tax incentives could go a long way in stabilizing supply and demand and boosting growth for the sector. The opportunity is there for all to see – all that is needed, now, is the will to realize it.
(Source: Financial Express)
