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Reviving the real estate sector

Experts say that the new govt should abolish the multiple tax regime and raise tax limits on home loans to Rs. 5 lakh

realestate Updated: Apr 17, 2014 20:27 IST

The real estate sector generates maximum employment in India after agriculture. With a growth rate of about 20% per annum, it has been contributing about 5% to 6% to India’s GDP. What will ensure the growth and development of this sector? There are definitely many important issues that need to be tackled by the new government when it takes over the reins at the Centre.

Experts say that the existing tax benefits on home loan interest and principal, introduced more than a decade ago, are grossly inadequate. The subject interest limit has remained unchanged for more than 10 years. Inflation and the consequential increase in residential property prices, have led to a huge increase in home loan amount and interests. The new government should increase the interest limit from Rs. 1.5 lakh to Rs. 5 lakh, which would provide much relief to the homebuyers and the necessary fillip to the real estate industry, says Neeraj Bansal, partner and head, real estate and construction, KPMG in India.

Multiple approvals, too, are a problem. To begin construction, a developer has to get approvals for building layouts, ownership, environment clearances, structural planning, utilities, amongst others. This can be very time-consuming, delay delivery deadlines and the resultant cost escalation can trickle down to buyers. “Hence, it is important to facilitate policy measures that streamline approval processes (both at state and national levels), which help reduce the number of approvals. This can be enabled by establishing regulatory bodies/investment boards to oversee the approval processes, especially for large scale integrated townships. Once these bottlenecks are addressed, we can expect the economic contribution of the sector to increase considerably,” says Renu Sud Karnad, managing director, HDFC Ltd.

Value added tax is another problem. It is generally levied on goods (about 4%) but buyers are also expected to pay 3% service tax and a stamp duty of around 6 to 7%. Experts say that constructed property is not treated as goods or services as it is immovable property. However, the issue around levy of VAT and service tax arises when an under-constructed property is sold. Ignoring the technicalities, and respecting the Supreme Court verdict, from an equity perspective, the new government should rationalise the applicable levies and avoid multiplicity of levies on the same transaction as it results in increase in property prices, imposing an additional burden on the homebuyer.

Sale of pre-constructed property is sale of an immovable property and cannot be considered as ‘sale of goods’ or ‘services’. Hence, only stamp duty and no VAT or service tax should be levied on it. Service tax (being a central levy) on such transaction should be reviewed by the new government as per the Constitution of India for levy of taxes. The VAT implications would still remain a matter of debate and a solution may be available only on revision of the decision of L&T by the constitutional bench of the Supreme Court. Alternatively, the early implementation of the goods and service tax appears to be the most feasible solution to such multiplicity of taxes, says Maadhav Poddar, Ernst & Young.

The new government should hasten to finalise and implement the draft REIT regulations issued by SEBI along with bringing in clarity on related tax aspects and foreign investment in REITs. Creation of a new instrument which can be publicly listed and traded on the exchanges would bring in a source of capital to the cash-strapped sector. It would help developers liquidate rent-yielding assets and utilise such funds to deliver residential projects stalled because of a fund crunch.

The new government should liberalise foreign investment guidelines for the sector. The original guidelines, issued nine years back in March 2005, need a re-look and substantial changes to help the sector evolve to its next stage. These relate to (i) minimum capitalisation - to be reduced (ii) minimum size - to be reduced (iii) lock-in on investors - to be removed (iv) mixed-use projects - no conditions to apply (v) sale of undeveloped land in exceptional circumstances - to be allowed etc. Foreign investment continues to be an important source of capital for the sector and needs to be encouraged.

Rana Kapoor, president, ASSOCHAM, expects modification in the policy stance to facilitate availability of developed land and single window clearances for projects to encourage private sector investment, which will provide a much needed fillip to the housing industry.

“We recommend that the government grant infrastructure status to the affordable housing sector to attract more capital and to allow insurance/pension funds to invest in the affordable housing sector. The housing and construction industry is critical as it is the second largest employer in the country after agriculture, supports more than 250 ancillary industries and contributes nearly 10% to the GDP. Impetus to the housing sector in the economy will generate employment opportunities of Rs. 60,000 crore,” he says.

(With inputs from Jeevan Prakash Sharma)