A recent report by a renowned property consultant showed MMR (Mumbai Metropolitan Region) and Delhi NCR leading the country’s 7 cities that account for India’s affordable housing market comprising 6 lakh units. The maximum supply is attributed to NCR and along with MMR contributes 55% of the total affordable housing segment.
Not only supply but even in terms of sales, MMR and NCR have surpassed the other cities accounting for 57% of the 3.98 lakh units sold within the price range of 40 lakh rupees. The other 5 cities included in the study are Kolkata, Chennai, Hyderabad, Pune and Bengaluru. In the words of the property consultant Chairman, investors are being lured by the expected annual growth of the affordable housing category by 8% to 10%.
As suggested by the data, 39 % of the residential units launched across these 7 major cities of India from 2014 to 2018, account for the affordable housing segment. The total number of units launched is 15.3 lakhs out of which 6 lakh units belong to the affordable category. These homes have been approved by PMAY (Pradhan Mantri Awas Yojana) but they need to be developed at faster.
The report cites some reasons for slow-paced development, which are as follows:
- Limited participation of the private sector despite the attractive statutory and fiscal benefits.
- Illegal slums and settlements
- Dearth of land
India’s Real Estate industry worth 180 billion dollars has a contribution of 6 to 7 % in the country’s GDP. It relies heavily on the affordable housing sector for its revival that has been awaited so long.
In 2017, the affordable housing sector has been conferred the industry status and the Government has been encouraging it incessantly in several ways. This segment has turned out to be a major driver of housing demand.
The Government has already been concentrating on the smooth conversion of the demand into actual sales. Thus, the demand in the affordable housing sector has become active for both the builders and home buyers. The Interim Budget 2019 addressing incentives to both the developers and consumers, also conforms to the objective of Housing for All declared by the Government.
During the prevailing liquidity crisis, developers have received the most required support through the extension of being exempted from paying notional tax on unsold inventory and tax rebates in the affordable category under Section 80 IB-A by 2 years. The buyers too, have been provided with added flexibility through the provision of tax breaks for those earning an income till 5 lakh rupees. Besides, the buyers can now utilize the capital gains obtained from their property transactions. These steps are likely to improve both demand and supply in the industry.
Housing projects matching the affordable criteria is entitled to a tax deduction of up to 100 % of the profits earned from those type of projects if they have been sanctioned within March 2020. The time-limit for availing tax deduction under Section 80 IB-A has been stretched to the following March by the Government.
The Government’s decision to free the builders from the payment of notional rental tax on unsold inventory for a duration of 2 years has proved to relieve the developers running short of cash.
Capital gains till 2 crore rupees obtained from a previously bought/ constructed house can be used just once in a lifetime to buy or build of two other residential properties. This is the proposition of the Finance Bill under Section 54 of the Income Tax Act, which might increase the demand for homes with lower ticket sizes with the investors seeking for suitable options in the low and mid-priced segments for utilizing the benefit of capital gains.
Besides, the tax rebate on income up to 5 lakh rupees will increase the disposable income of the buyers as they will be able to save around 12,500 rupees in a year that will consequently help them in getting a loan of nearly 1 lakh rupees.
On the contrary, the Government has decided to reduce the CLSS benefits under PMAY, allowed to the LIG (Lower Income Groups) and EWS (Economically Weaker Sections) by 54 % that amounts to 6,000 crore rupees. The reduction for the MIG (Middle Income Groups) is by 33 %, which is 4,000 crore rupees. But that might not impact much since the deploying of funds is essential.
New Tax Rules for Real Estate to be Introduced by GST Council
The new tax rules to be announced by the GST (Goods and Services Tax) Council will state the limit to which the developers can avail of the Input Tax Credit benefit on the payment of tax on the construction inputs April 1 onwards when the new tax system comes into effect.
A formula has been designed by the GST Council for the developers to take advantage of the ITC benefit to a certain extent instead of eliminating Input Tax Credit entirely. As explained by a Government official, unused credit will either impact the margins of developers or escalate the property price. This might have caused the policymakers to decide on allowing ITC benefit so far it is possible.
These rules will also state the circumstances based on which, those sale transactions that have begun in the existing tax scheme but will get sealed after April 1, will qualify for availing Input Tax Credit. Whether the payment of taxes on raw materials have been already made but the construction is yet to start or has reached halfway will be considered for bringing into effect the renewed terms
of ITC availability to the builders. This move is crucial for developers struggling with project delays.
Extensive discussions have been held on the new tax jurisdiction’s influence on the industry. The period of maturation is quite long in the case of the Real Estate sector in comparison to the other industries. This has been considered while devising the formula that will allow buyers to use ITC benefit.
The changing tax regime can be defiant for builders if they aren’t allowed the privilege of tax credit because whatever unused credit they have in store at the moment will no more remain an asset if they are rendered unusable after April 1, and instead will become an additional expense for them that they will have to exhibit.
Those buyers who have booked homes but will have the deal closed after April 1, might insist to pay only the amount charged at 5 % GST while the developers will prefer using their available ITC benefit by asking the former to pay GST at the previous rate of 12 %.
The provisions meant for the transition to the new tax regime are required to be made in a manner such that they do not result in dispute between the home buyers and builders. We can only hope for the best.
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