The real estate sector is one of the main contributors to the country’s GDP and the second largest employer in the country. The sector is the engine of more than 200 industries, from manufacturing to services. Any incentive extended to real estate can also stimulate all ancillary industries.
In this context, we propose measures that can serve the cause of the stimulation of the real estate sector and revive the economic growth of the country while maintaining a fine balance on its finances.
■ Targeted tax deduction on the principal repayment of housing loans (section 80 C)
Currently, section 80 C of the Income Tax Act does not provide for a targeted housing benefit. There are many investment alternatives available to taxpayers to choose from, and the lack of an exclusive tax advantage on the principal amount of home loans makes consumers indifferent to buying a home. A separate annual deduction of INR 150,000 for principal repayment will provide the much needed boost to opting for home loans, reviving credit growth in the banking system and providing a boost to home sales.
■ Increase in allocation to SWAMIH fund
The liquidity situation in the NBFC sector especially among those actively lending real estate was poor after the IL&FS crisis and many cut back their operations. In such a context, the fund of assets stressed to revive blocked residential projects is progressing well with several sponsored projects which see the light of day at the end of the day after years of construction delays. The fund set up by the government has a well-developed mechanism to prevent abuse and ensure timely completion of projects with proper supervision. The government should consider increasing the size of the fund. With the increased financial support, the fund can also be encouraged to lend to more projects until the NBFC sector gets back on its feet.
■ Promote a REIT dedicated to public sector companies (PSU – REIT) to raise capital
Public Sector Banks (PSBs) need an injection of capital to fund losses induced by a pandemic and Public Sector Units (PSUs) need to make new investments to support economic growth. However, given the government’s difficult financial situation, it may not be able to provide much capital for both. In such a situation, the government can float a PSU REIT to raise the capital required for PSUs. As evidenced by the case of the two REITs listed on the Indian stock exchanges, there is a huge appetite for profitable assets in India and one can expect a similar or greater appetite for a REIT PSU.
According to Knight Frank’s estimates, PSUs are based on a REIT potential of over INR 1.2 trillion based on the book value of office assets of 45 listed PSUs. The actual quantum can be multiplied by several if these assets are valued on the basis of market value and the office assets of unlisted PSUs are also added to this REIT. In addition, our analysis shows that this money can be raised at a lower cost than what these PSUs have raised through debt in recent years, which also works in favor of PSUs. To encourage greater retailer participation, investments in such REITs PSUs should be considered for deduction under Section 80C of the Income Tax Act.
■ Reinstatement of the input tax credit on projects under construction
The government’s earlier decision to reduce GST rates on real estate to 5% for residential projects and 1% for affordable housing projects was a welcome move. However, the elimination of the input tax credit (ITC) minimized the benefits of this reduction. Since developers cannot claim tax credits for the GST paid on inputs, this amount adds to the cost of construction and results in higher apartment prices for buyers. Moreover, it also negates the purpose of the GST, which was to eliminate the cascading effects of taxes. The government can use this budget session to allay this concern and ensure the recovery of the ITC at the next GST council meeting.
■ Credit Linked Subsidy System (CLSS)
The Credit Linked Subsidy System (CLSS) has enabled a remarkable increase in the level of activity in the affordable housing sector. However, the program will end on March 31, 2021. Given the COVID-19 pandemic disruption and a likely two-year timeframe for the economy to recover from the impact, the CLSS program timeline should be extended until ” as of March 31, 2023.
■ Increase in the amount of the subsidy under the CLSS scheme
The CLSS program has done a commendable job in increasing stakeholder interest in creating an affordable housing stock in the country. The amount of the credit subsidy is calculated here on the basis of variables defined as household income, the percentage of interest subsidy, the maximum loan term, the amount of the eligible loan and the discount rate; to arrive at the grant amount that is prepaid by the government. The amount of the grant for the intended beneficiaries in the three categories EWS / LIG, MIG I and MIG II amounts to INR 267,280, INR 235,068 and INR 230,156 respectively.
Although the amount of the subsidy is significant for the EWS / LIG segments, in the case of MIG I and MIG II, the amount of the subsidy as a percentage of the home’s value remains a small factor in increasing the purchasing decision. of a house. Additionally, considering market dynamics, 35% of homes sold in 2020 in the top 8 cities were in the INR 5-10 million segment. Given the relatively higher prices in the big cities, the amount of this subsidy should be increased to 350,000 INR with a corresponding improvement in the income criteria, which will make the amount of the subsidy larger in relation to the value of the House. As seen in recent state initiatives regarding fee reductions, incentives of around 3-5% have the potential to become a decision maker and serve the cause of housing demand.
■ “ Status of the industry ” in real estate
The status of the industry would allow developers to raise funds at lower rates, lower their cost of capital, and increase their execution capabilities. Reducing the interest burden will also help to reduce selling prices to some extent.
■ Focus on infrastructure
Besides the direct focus on real estate, another crucial area of intervention is urban mobility. In this regard, the government should accelerate its infrastructure development initiatives which will open up cheaper plots for housing and ensure better housing accessibility.
■ Rental housing
To meet urban housing needs, the government should consider promoting the development of an institutional rental market by providing incentives for market creation. The rental model bill is a step in the right direction. While progress is expected on the draft guidelines, the government must also align with changing consumption patterns, as trends like co-living are already gaining ground. On an individual basis, a higher housing allowance (HRA) or related benefits can be extended to these rental housing avenues to help consumers opt in with the associated tax benefits. On an institutional basis, fiscal measures such as tax breaks / tax exemptions for rental housing will give this segment a boost before it becomes a widely accepted organized market model.
■ Real Estate Investment Trust (REIT)
The government can push the REIT program further by reducing the investment timeframe from three years to one year for long-term capital gains taxation; thus ensuring greater participation of retail investors.
Shishir Baijal, Chairman and CEO, Knight Frank India
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