India Budget 2019: A string of policy reforms including Real Estate [Regulation and Development] Act (RERA), demonetization, real estate investment trust (REIT) and GST had been instrumental in bringing the Real Estate industry towards more organized and transparent structure. Government’s announcements in the form of affordable housing, new industrial corridors, smart city plans etc had also boosted infrastructure in the country. However, the Real Estate sector has not been going through the best of times. Sales have plummeted to historic lows. The sector is currently undergoing a bearish phase and has 4 major concerns – (a) increased input cost due to abolishment of input tax credit and exorbitant development premiums (b) severe liquidity crisis due to NBFC defaults and rising NPAs of banks (c) piling up of unsold inventory due to weak consumer sentiment on back of high unemployment, and (d) No “industry” status to attract equity investments and access to debt funds at low interest costs and reduced collateral values.
Surrounded by a series of disruptions, the sector was quite hopeful that the Government would introduce clutch of reform measures in the Union Budget 2019. However, the Budget has several misses as far as the required reforms in real estate sector is concerned. The Government has been focusing heavily on Affordable Housing sector and its Housing for All commitment by 2022. The Government’s appreciation of the fact that the current rental laws are archaic, as they do not address the relationship between the Lessor and the Lessee realistically and fairly, is commendable. The Finance Minister’s proposal to introduce reform measures to promote rental housing, including the finalization of a model tenancy laws would definitely boost the rental markets and make good the growing housing shortage as a result of increasing urbanisation. It is imperative now to frame National Rental Housing Policy and incentivize rental housing to meet Housing for All commitment by 2022. Under the Pradhan Mantri Awas Yojana-Gramin (PMAY-G), a total of 1.54 crore rural homes were completed in the last 5 years and in the second phase of PMAY-G, ie during 2019-20 to 2021-22, 1.95 crore houses are proposed to be provided to eligible beneficiaries, along with amenities like toilets, electricity and LPG connections. The Finance Minister also mentioned that with the use of technology, DBT platform and technology inputs, the average number of days for completion of houses was reduced from 314 days in 2015-16 to 114 days in 2017-18. These statistics showcase progress in the right direction. The change of guard over the housing finance sector from the National Housing Board (NHB) to the Reserve Bank of India (RBI) could mean stricter asset quality reviews and tougher restrictions for lenders. The Budget also doesn’t provide the much-needed industry status and single window clearance to the sector.
On the income tax side, the re-alignment of Section 80-IBA conditions in the form of inclusion of non-metropolitan cities of Bengaluru, National Capital Region other than Delhi (ie Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad) and Hyderabad for qualifying condition of 1000 square meters of plot size demonstrates the rising demand for affordable housing in these cities. The increase in carpet area of the residential units to sixty square meters for the metropolitan and its akin cities and ninety square meters for other cities is a welcome move. However, the ask to remove the Floor Area Ratio (FAR) restrictions of 80/ 90 percent, has not been considered, which may continue to be a hindrance considering low density prescribed at many places. The condition of stamp duty value of a residential unit in the housing project not to exceed INR 45 lakhs would pose another significant challenge for developers. Despite enjoying tax holiday under normal provisions of the Income Tax Act, the affordable housing segment would continue to pay taxes under the Minimum Alternate Tax (MAT) provisions. The industry’s ask of eliminating Section 194-IA has also not been considered, instead it has been clarified that withholding would apply on charges of the nature of club membership fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of immovable property. Cash withdrawal withholding tax of 2 percent under Section 194N of the Income Tax Act, on sums exceeding INR 1 crore may also need to considered closely by the real estate sector, which being labour intensive, follows the practise of paying daily wages in cash.
On the demand side, while the Finance Minister announced additional deduction of INR 1.5 lakhs to provide impetus to the ailing real estate sector, the devil lies in the fine print. Section 80EEA has been introduced in the Income Tax Act to give effect to this announcement. The qualifying conditions for this deduction under Section 80EEA as per the Finance Bill 2019 (No 2) are – (a) loan to be sanctioned by the financial institution during the period beginning on April 1, 2019 and ending on March 31, 2020 (b) stamp duty value of residential house property does not exceed forty-five lakh rupees (c) assessee does not own any residential house property on the date of sanction of loan. The technical analysis of these provisions would mean that this additional deduction is not available to assessee already owing residential house property and would also not cover the assessee who has already availed loan prior to April 1, 2019. Further, this deduction would be available only for residential units, the stamp duty value of which does not exceed forty-five lakh rupees.
Though these are welcome changes and suggests the Government’s intent to address existing inefficiency in the system, a lot more needs to be done to revitalise the sector. Overall, the real estate sector doesn’t get a leg up by the Budget 2019. The wait gets longer!