Budget 2023: Extend affordable housing sops to all real estate projects, give relief to homebuyers

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Harpreet Singh and Naveen Gupta

The year 2022 was a mixed bag for the real estate (RE) sector. While the country was largely free of COVID-19-induced disruptions leading to an uptick in demand, the geo-political crisis saw major headwinds for the nascent recovery. In this background, the RE developer community is looking up to the government to address some issues plaguing the sector in the upcoming Budget 2023.

RE sector is one of the largest employment generators, second only to agriculture, and with an output of $180 billion, it contributes around 7 per cent to the Indian GDP. Being the key demand driver of 2 core sectors – cement and steel, real estate is a key component of economic growth. However, the developers are beset by major challenges. On one hand, rising input costs and high finance costs have dampened the viability of ongoing projects and subdued demand has added to the existing pile of unsold inventory.

The article seeks to highlight some of the measures the government may consider in direct tax and indirect regulations for the RE industry.

Extend existing incentives

With regard to direct tax incentives, the existing 100 per cent profit-linked deduction on affordable housing projects, applicable to projects approved by March 31, 2022, may be extended to all housing projects and even for upcoming projects. Similarly, the provisions relating to the allowability of a 100 per cent deduction on capital expenditure incurred on affordable housing projects may be extended to all commercial and residential RE development projects.

The present provisions incentivise only affordable housing projects and complement the benefits available to similar projects under the Pradhan Mantri Awas Yojna, geared towards the mission of housing for all. Extending these incentives to all housing projects will simulate fresh investments in the sector by significantly improving the return on investment for developers and investors, which has fallen due to high input and finance costs.

Relief to buyers 

To keep inflation under check, the repo rate has been hiked by the RBI by more than 200 basis points in 2022. This has significantly impacted borrowers as generally home loans are on a floating rate basis and banks have passed on the rate hikes to the loan borrowers. The current limit of Rs 2 lakh as a deduction for the interest on a home loan for self-occupied property for the year needs to be reviewed and to be doubled, at least, in view of inflation and hiked interest rates. This may act as a catalyst for housing demand.

GST measures

Concerning GST measures, the threshold for affordable apartments (attracting GST at the rate of 1 per cent) should be increased from the current Rs 45 lakh, as it was fixed in April 2019 and needs revision in light of the multifold increase in real estate prices, specifically in big cities. Further, a proper mechanism should be put in place to regularly review such a threshold.

In addition, types of residential apartments could be divided into three categories – affordable, other than affordable and luxury. The affordable may be exempted, other than affordable should be taxed at a minimal rate and a higher rate may be applied only on luxury apartments. Presently, GST law bifurcates apartments into two types– affordable and other than affordable on which GST is payable at 1 per cent and 5 per cent respectively.

The taxability of development rights has been clearly specified under GST provisions; however, the law does not provide any definition of development rights. It is crucial to provide clarity on what constitutes development rights from the GST perspective. Also, appropriate clarifications as to the GST implications, including its valuation, are required in case of subsequent assignment of development rights and leasehold rights along with superstructure or otherwise to another person against the agreed consideration.

Commercial properties

There has been a surge in the letting of commercial properties, specifically after COVID-19, wherein new business ventures are heavily dependent on renting required premises and ancillary infrastructure. The developers are not allowed to take credit in respect of the construction of these buildings which inflates lease rental. Though the matter is pending before the Supreme Court, policymakers may consider providing the concession.

The inward supplies for the construction of apartments majorly attract GST at 18 per cent and cement at 28 per cent. The developers are not eligible to take credit on such supplies generally. Lowering the tax rates on inward supplies will provide relief to the stakeholders.

Co-working spaces have shaped up to be a major contributor to the commercial RE sector, but 10 per cent TDS (tax deducted at source) on their receipts results in working capital blockage for this industry in its infancy. A lower TDS rate of 2 per cent would provide significant work capital relief.

The above steps are likely to increase the viability of RE development projects and provide much-needed liquidity to the developers saddled with huge debt and unsold inventory. Additionally, various tax incentives may be offered to buyers to induce home buying and facilitate demand. Collectively, these steps will provide a much-needed fillip to the RE sector, a key growth lever, as India looks to achieve to become a $5 trillion economy by 2025 and a developed economy by 2047 at the stroke of 100 years of independence.

Harpreet Sing Singh is Partner – Indirect Tax and Naveen Gupta, Partner, International Tax & Regulatory at KPMG in India