Why is real estate regulation caught in a time warp?

Parliament sessions, including the February 1 Budget session, have been largely silent on changes in taxes, as well as regulations with respect to real estate. However, as more activities in these areas go virtual, regulation and legislation may need to keep pace. Classes to conferences and currencies to campaigns are now more prominent in their virtual avatars. Though real estate and the homes we live have not become virtual, as more things go virtual regulation in the real estate sector will start appearing more jarring.

Any real estate development begins with master plan, and the core of a master plan lies in zoning regulations. Planners and regulators demarcate a separate residential zones, commercial zones, institutional zones, etc. Residential areas are meant to have minimal activities, and are planned accordingly. Commercial zones have larger activity so have broader roads and being driven by commercially activities, there is political correctness in taxing them higher than residential zones. Accordingly, there are strict regulations and coercive restrictions on commercial activities in residential zones.

With work from home (WFH) becoming popular, zonings appear unreal. As WFH starts encroaching more territories, people have begun to have a dedicated room at home as an ‘office’ room. In future people may even start inviting office colleagues home. Seeing this trend, developers may start providing an ‘office room’ in every home. Will then such buildings be still qualified to be in residential zone? Would it be fair to charge commercial taxes to such housing units?

Further, affordable housing has all along been defined by size. If apartment owners choose to buy homes with extra ‘office room’ so that they travel less and thus have a lower carbon footprint, then would it be politically correct to disqualify such homes from being called affordable homes just because they are big as per the regulation? Would it be fair to demand higher property taxes (because of the bigger size) from such homes that are actually more environment friendly?

Budget 2022 has moved in the direction of a non-confrontational approach towards virtual digital assets. Therefore, smart and tech-savvy developers may now start thinking of creating NFTs (Non Fungible Tokens) for the housing units. Instead of sale and conveyance, developers may transfer the ownership of NFTs. It’s a legal and secured transaction. Such transactions would then need government services for recording and safeguarding this sale (and also future transactions of the property) at a hefty stamp duty of 5 percent per transaction (in some states even 12 percent).

Smarter developers may even create NFTs for under-construction units, and then they need not be required to pay GST on sale of NFTs that represent under-construction units. If regulators try to tax NFTs that represents housing units, then, it would mean collecting taxes even from foreigners who could be owners of such NFTs. This could lead to a more complex situation of legitimising foreign ownership of India real estate. Worse still, what if the foreign owners happen to be from an enemy country? Taxation of such NFTs could then be a violation of the Enemy Property Act. It’s like toppling dominoes on a minefield!

The challenges faced in real estate regulation are not limited to the trends in the virtual world. The marketplace in the real world, too, is demanding that regulation be more nimble, more agile, and more forward looking. There is an increasing demand on rental homes from the young working class. Often they find it difficult to rent apartments as developer are interested only in selling units. The solution lies in finding investors who can buy homes, and give them out on rent.

Over the years, regulation has restricted tax benefits only to the first or to the second home, since owning more homes has all along been seen either as hoarding or as a dead investment. But maybe it is time to look at renting homes as an urban infrastructure activity, and not as a real estate play.

There are many more challenges the real estate sector is facing. The moot point remains that land-based taxes (stamp duty, GST, premium for FSI, land development charges, property taxes, etc.) remain too high, and form ~25 percent of the revenues of the industry as against 5-12 percent for food and clothing.

If regulation remains unreal, and does not normalise, there are external developments that will force such change. The power of regulation is territorial in nature. Technology and market forces are not limited by such boundaries.

Deepesh Salgia is director, Shapoorji Pallonji Real Estate. Views are personal, and do not represent the stand of this publication.