The growth of the real estate sector has its links and its impact on multiple sectors and therefore justifies an integrated approach for a holistic and sustainable development.
Image courtesy of McKay Savage / Wikimedia Commons
The Reserve Bank of India (RBI) ‘s upward revision of growth forecast to -7.5% for fiscal year 2020-21 reinforces the government’s view that the economy is experiencing a V-shaped recovery. There is no doubt that the economy is recovering at a faster rate than expected and high frequency economic indicators indicate that GDP growth will return to positive in the second half of the current fiscal year. At the same time, the new highs recently reached by the stock markets are driven by the optimism surrounding corporate results at the start of the third quarter.
While the government has made necessary and timely interventions through cash injections, budget support and reform-oriented investments, the main focus has been on supply to revive the economy. in trouble. It will now be essential to inject several measures on the demand side to maintain the pace of the recovery and get the economy back on its feet. Although we saw a continued recovery in the fourth quarter that began in the third quarter of 2020, actual market transaction volumes continue to be below pre-COVID levels in the real estate industry.
In the residential segment, sales in 2020 reached around 52% of the volumes observed in 2019. The net absorption in the office segment reached 81% of what we observed between 2016 and 2018. At the same time, it There are other segments such as retail, hospitality, etc., which continue to come under enormous pressure exacerbated by the pandemic.
As the economy continues to unblock with businesses returning to normal, the 2021 budget is important because it will play a central role in shaping the contours of the next phase of economic development. In this context, we believe that the following additional measures will help stimulate consumption, investment; which has resulted in continued recovery driven growth over the next few quarters.
While the government has already granted affordable housing “infrastructure” status, the long-standing demand for “industry” status for the entire real estate sector remains unfulfilled. The growth of the real estate sector has its links and its impact on multiple sectors and therefore justifies an integrated approach for a holistic and sustainable development. Since the sector has already undergone significant structural reforms resulting in increased transparency, accountability and efficiency, granting “industry” will further stimulate investment and employment.
Extension of u / s advantage 80EEA
The extension will benefit from an additional interest deduction of Rs 150,000 on mortgage loans to the following:
- Existing home buyers who have already made use of home loans
- First-time buyers must also include the middle segment
Section 80EEA provides for an additional interest deduction of Rs 150,000 on the mortgage to first-time buyers when the value of the property does not exceed Rs 45 lakh. This benefit (currently available for mortgage loans sanctioned until March 31, 2020), should be extended by at least one year to continue to benefit first-time buyers.
Additionally, the government should consider extending this benefit to mid-segment home buyers by increasing the property value threshold. This will provide a strong boost to buyers of affordable and midsize housing, as the residential market has shown promising signs of recovery through these segments over the past few months. More than 50 percent of launches are still concentrated in the size of banknotes below Rs 75 lakh in the 7 major markets in India. Taking a head start, this advantage can also be extended to existing home loans (fulfilling the eligibility criteria) in a time-bound manner to provide tax relief for homebuyers in these tough times.
Repayment of the capital of real estate loans
A separate provision to allow the principal repayment deduction (which is currently part of the 80C deduction) will provide homebuyers with higher tax benefits towards the last stage of the loan term. This will be a welcome relief in the current scenario where many home buyers are struggling with meeting their financial commitments.
Trigger loss of home ownership
The 2017 finance bill introduced provisions to limit compensation for losses of real estate with other heads of income to Rs 2 lakh during the year. The existence of this restrictive covenant severely weakens investment sentiment in the housing market due to a lower effective after-tax return. Removing this restriction will allow the individual to claim the full interest on their rented property without any limit, which will result in a higher effective after-tax return on the purchase of the property. This is expected to boost investment in the housing sector, at a time when developers are under enormous stress to increase their inventory and generate sufficient cash flow for the livelihood of businesses.
REITs for long-term capital gains
The success of two listed REITs has opened up a new avenue for retail investors. Since REIT units are similar to listed stocks, the tax treatment of capital gains should be aligned by reducing the holding period from three years to one year. This will improve liquidity and help increase retailer participation. In addition, a reduction in the holding period will give REITs a level playing field with competing equity instruments.
Allow 100% FDI in residential projects
At present, 100% FDI is allowed automatically only in residential projects under construction. The decision to allow FDI in completed residential projects will help unlock the capital held in unsold inventory, thereby saving cash-strapped developers. This is likely to lay the foundation for residential real estate assets held by institutions in India.
Allow input tax credit to developers
The government has reduced the burden of the GST by streamlining the effective rate on residential housing projects. But the unavailability of input tax credit (ITC) for developers resulted in minimal price reductions for homebuyers, more than offsetting the GST cut. If the ITC is restored, it can help developers pass the tax benefit on to homebuyers.
Likewise, ITC should be authorized on the development of commercial real estate intended for rental purposes. In accordance with Article 17 (5) of the Central Goods and Services Tax Law, the input tax credit cannot be claimed on the GST payable on rental income. ITC’s denial therefore resulted in increased construction costs, a freeze on working capital and a negative impact on developers’ cash flow.
The author is Chief Economist and Executive Director of Research and REIS, JLL India.
Budget 2021, Real estate, ITC, FDI, REIT, Real estate, Home buyers, Developers,