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From liquidity to stress fund: Real estate, homebuyers' Budget expectations

Experts say the liquidity crisis is a major factor preventing completion of over 560,000 stalled units across top seven cities

Bhaswar Kumar  |  New Delhi 

house, building, real estate

The real estate sector is looking to the FY20 Union Budget, which will be announced on July 5, to help it recover from its liquidity woes. Meanwhile, homebuyers are also hoping for announcements that would ease their hardships.

In 2017, real estate contributed about 6-7 per cent to India's gross domestic product (GDP). Further, the sector is expected to contribute about 13 per cent to the country's GDP by 2025 and is seen becoming the third largest globally at around $1 trillion by 2030, according to a 2018 KPMG report. It was worth $120 billion in 2017. Budget announcements that give a boost to the real estate sector could provide a positive push to the slowing economy, as well as create more jobs.

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Solving the liquidity crisis

The real estate sector is hopeful the government will resolve the liquidity crisis it is facing. Bhutani Group CEO Ashish Bhutani says, "A vital reduction in interest rates will spur a drastic improvement in the existing liquidity crisis and will ensure the money flow in banks and NBFCs."

In September last year, the liquidity crisis became apparent after infrastructure lending major IL&FS defaulted on a few of its commercial papers, which impacted several segments, including the real estate business.

ANAROCK Property Consultants Chairman Anuj Puri says that the liquidity crisis is the major factor preventing completion of over 560,000 stalled units across top seven cities. "The government could possibly increase the finance limits for NBFCs -- a major source of funding for developers," he says, adding, "This will help revive the sector to a large extent."

Puri also advocates increasing bank funding to developers. "Besides NBFCs, the government must take steps to ensure bank funding to developers as the severe fund crunch is contributing significantly to project delays," he adds.

Industry status for the sector has been a long-standing demand. While the government accorded industry status to the affordable housing segment in 2017, builders and developers feel it should be extended to the entire sector.

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ABA Corp Director and Credai Western UP President (Elect) Amit Modi also says that not having industry status has made it difficult for the real estate sector to avail of legitimate finances from banks and other financial institutions. "Industry status can help in getting low-cost loans from the system, and the cost benefit can be further moved on to the consumers," he adds.

On the regulatory and direct tax front

Single-window clearance for projects is another long-standing demand, which the sector expects the new government to address.

ABA Corp's Modi says that given the multiple permissions and approvals that developers have to secure and the lack of single-window clearance at present, it can take anywhere from 18 to 36 months before beginning any project. "Single-window clearance won't just cut down on project delays but also significantly impact construction costs," adds Modi.

"Apart from the usual demand for single-window clearance and industry status for real estate projects, what should ideally be included in the Budget are further tax sops to homebuyers and investors," says ANAROCK's Puri. To a large extent, this can help the sector recover from its liquidity woes.

Puri says that while February's Interim Budget did try to woo back investors and buyers by offering some sops, there is a need for more direct benefits by way of reduction in income tax slabs, higher relief on housing loan rates, and an increase in the deduction limit under Section 80C from the current Rs 1.5 lakh a year. "The fact that the deduction limit under Section 80C was last increased in 2014 after a hiatus of a decade strongly indicates that the government could consider revising it now," he says, adding that though it would eventually be an added burden on the exchequer, it would help bring back buyers and revive the sector.

Homebuyers, for their part, are also looking for tax sops. Among the Budget recommendations listed in its letter to Finance Minister Nirmala Sitharaman, the Forum For People's Collective Efforts (FPCE), a not-for-profit entity that espouses the cause of homebuyers, has also said that to encourage savings and expenditure, the limit of tax deduction under Section 80C should be increased to Rs 3 lakh.

FPCE has also said that Section 24(b) of the Income Tax Act, 1961, should be amended to provide for deduction of interest from income from house property even after the possession of the house is received from the builder after more than 5 years. "This limitation clause is punishing honest homebuyers for no fault of theirs as delay in getting possession is solely due to fault of builders," it adds.

Further, in cases where the assessee is paying both EMI and rent and the date for the scheduled handover of possession has passed, there should be deduction for EMI paid from the total income of such an assessee over and above any other deduction being provided at present.

ABA Corp's Modi also recommends that the government should increase the limit of tax deduction for housing loans up to Rs 5 lakh from the present limit of Rs 2 lakh per annum. He adds that a similar limit should also be set for principal loan repayment from Rs 1 lakh at present.

Gaurs Group MD and Chairman of Credai's Affordable Housing Committee, Manoj Gaur, expects this year's full-budget to increase the income tax exemption limit of the Income Tax Act, 1961, from the current Rs 2.50 lakh to Rs 5 lakh, which will encourage people to go in for their own residential premises.

Fixes needed in GST

Gaur also says that the real estate sector wants the re-introduction of input tax credit (ITC), which had been withdrawn recently, under the Goods and Services Tax (GST). "With the ITC benefit, property prices will remain under control," he says. Gaur adds that the sector is also in favour of bringing stamp duty and registration charges in the ambit of GST.

In February 2019, the GST Council lowered tax on the under-construction properties to 5 per cent from 18 per cent, and affordable housing projects to 1 per cent from 8 per cent, with effect from April 1. This rate cut, in effect, did away with the ITC or refund given to builders on taxes paid on inputs. (3)

Agreeing with Gaur, Pradeep Aggarwal, co-founder and chairman of Signature Global and chairman of ASSOCHAM National Council on Real Estate, Housing and Urban Development, says that Finance Minister Sitharaman will have to pay attention to input tax credit, otherwise it will be a direct hit on affordable housing as houses will become even more expensive and will be away from the common man's reach. "The government should reduce GST to single digit on building material such as steel and cement, etc, as well as on contractor service, among other things," he adds.

Aggarwal also says that in the Union Budget 2019-20, he expects the government to double the amount of fund allocation for Pradhan Mantri Awas Yojana. "This will enable more people to realise the dream of owning a home and also help the government in achieving the goal of 'Housing for All' by 2022," he adds.

Also advocating for reinstating input tax credit in GST, ANAROCK's Puri says, "Without ITC benefits, builders are seeing sizeable drop in their profits and will eventually pass the buck on to buyers in the form of higher prices."

Homebuyers are also in agreement. In its letter to the finance minister, the Forum For People's Collective Efforts has said that the regime of 8 per cent GST with ITC benefit should be brought back to the real estate sector in order to reduce the GST burden for consumers. According to FPCE, with ITC benefit, the net GST rate will be less than 5 per cent, which will bring relief for consumers. "The present GST regime of 5 per cent without ITC benefit is actually translating into a tax burden of around 14 per cent for consumers, which is becoming a heavy burden for them," it says.

Helping homebuyers

While the Real Estate (Regulation and Development) Act, 2016 (RERA), and the GST regime have brought transparency into a sector that was used to operating in an opaque environment, homebuyers still feel there are issues that the government needs to address.

In its letter to Finance Minister Sitharaman, the Forum for People's Collective Efforts has said that despite RERA, most ongoing projects have not been completed. FPCE proposes to end this problem by creating a "stress fund" to the tune of at least Rs 10,000 crore to complete stuck real estate projects across the country. The objective would be to complete all pending real estate projects within a span of 5 years by continuously providing for such a stress fund during that period. Subsequently, it says, the strict implementation of RERA would ensure that the chances of such delays recurring would be minimal.

FPCE also says that the government should constitute a task force under the Ministry of Housing and Urban Affairs to identify projects that should be taken up first for completion and to also identify a public sector enterprise that could be assigned the job of completing these identified projects under the supervision of the task force.

Lastly, FPCE states that under the Insolvency and Bankruptcy Code, 2016, homebuyers are categorised as unsecured creditors, thus putting their life's savings at risk. Therefore, the government should immediately, either through the Finance Bill or otherwise, move an amendment to the Insolvency and Bankruptcy Bill, 2016, providing for homebuyers to be made "primary secured creditors".

First Published: Fri, June 28 2019. 12:11 IST