In line with its ambitious goal of making India a $5 trillion economy by 2025, the government needs to strike a fine balance between ease of doing business and ease of living. Recently introduced reforms such as reduction in corporate tax and rollback of surcharge for foreign portfolio investors (FPIs) have acted as a business sentiment booster, especially for the real estate sector.
As a result, investment quantum in the real estate sector grew by 27 percent YoY to reach $6.06 billion in 2019 from $4.76 billion in 2018. A majority of capital inflows (57 percent) were from foreign players.
The upcoming Union Budget 2020-21 raises expectations of holistic development through long-term solutions designed to stimulate demand across the industry, including real estate.
Some of these expectations are listed below:
NBFCs and HFCs
Creation of a special purpose vehicle (SPV) to purchase assets from NBFCs would go a long way in providing these entities headroom to lend, considering that they are critical for last-mile funding.
Funding should also be increased for the National Housing Bank (NHB) to allow cheaper mortgages, standardized costs of building materials, faster approval processes, and targeted fund allocation for low-cost housing projects.
ECB norms should be relaxed for Housing Finance Companies (HFCs): Current norms state that it is mandatory to have a capital of more than Rs 300 crore and a track record of a minimum of five years. Since a majority of the HFCs catering to the affordable housing segment are relatively new, the norm can be relaxed to ease capital penetration to the affordable segment. The budget should widen the ambit of ECBs for construction finance to a broader range of housing (not limiting it to low-cost/ affordable housing).
Government encouragement to states to provide land at subsidized rates and increase FSI would go a long way in boosting affordable housing.
It should also look at a lower/ waive off stamp duty for home loans of up to Rs 10-15 lakh for the LIG/EWS segment across the country.
For MIG I and MIG II categories, CLSS norms related to household income and eligible housing loan amount should be relaxed:
MIG 1 – income limit of Rs 6-12 lakh can be increased to Rs 18 lakh; loan limit can be extended from Rs 9 lakh to Rs 12 lakh.
MIG 2 – income limit of Rs 12-18 lakh can be increased to up to Rs 25 lakh; loan limit can be extended from Rs 12 lakh to Rs 18 lakh.
The sunset clause needs an extension, especially in the midst of the anticipated impact of automation and technology on the IT sector. Withdrawal of any tax incentives from SEZs might hit exports and job creation. The incentives can be phased out in a truncated manner; for instance, reduce incentives from 100 percent deduction to 75 percent and so on.
Income tax credit should be restored The developer community is seeking 100 percent ITC as granted with 12 percent tax. However, a 5 percent GST with no ITC means input prices might increase, which will eventually be passed onto buyers.
Separate deduction for home loan principal: The deduction under Section 80C also covers principal repayment on home loan deduction. This needs to be done away with and a separate deduction should be allowed for repayment of principal on home loans.
Cement (28 percent) and steel (18 percent) should attract a lower GST. One of the reasons why the government has kept materials, such as sand, granite, bricks etc., in the 5 percent bracket, but kept cement in the 28 percent bracket is the widespread use of cement in government-led infrastructure projects. Cartelization of cement and monopoly of prices by leading cement companies has been a major concern for the government. The government is also concerned that a tax cut could result into reduced revenues, even as there will be no surety on input tax credit (ITC) being passed on to buyers. Hence, it is recommended that the government bring out specific guidelines on setting prices and transfer of ITC for the cement industry and reduce the GST on cement to 18 percent or even lower.Infrastructure status
While infrastructure status has already been granted to affordable housing and logistics, it should now be extended to integrated townships and the entire real estate sector
, especially post the implementation of RERA and other structural policy reforms.Conclusion
The government has remained quite pro-active in stemming the effects of a manufacturing and consumption slowdown by addressing liquidity challenges faced by NBFCs and banks as well as by easing investment inflows into the country.
However, it now needs to back up these measures by boosting consumption across the country. One way of doing this could be by boosting employment through schemes such as MGNREGA and by providing incentives to SMEs and MSMEs. Also, push for execution of large-scale infrastructure projects would not just encourage investment inflows, but would also boost job creation.
Further, an increase in fund allocation is critical to boosting rural consumption; this would boost village economy and raise incomes, particularly of small and marginal farmers.The author is Chairman and CEO, India, South East Asia, Middle East and Africa, CBRE