Policy | Will the budget change the future course of the real estate landscape?

The Indian real estate sector has been in the doldrums during recent years, particularly since demonetisation lapped down a large source of funds that had supported the industry, and subsequently, in the hands of the RERA, GST, and the NBFC liquidity crunch. The sector witnessed its first growth phase of the decade in 2018, the second half of which marked a 119% escalation in new launches of residential housing projects across cities, 60% of which targeted India’s middle-class, and were priced at below Rs 50 lakh.

In a move to grab onto these recent signs of recovery, as well as provide an election-safe taxation agenda, the interim budget tabled in February had proposed an array of measures to augment growth in the real estate sector and reduce tax burden, particularly on middle-class and first-time home buyers.

The interim budget sought to increase the number of self-occupied houses exempt from ‘notional rent’ tax from one to two houses, and allowed investment of long term capital gains in two houses tax-free, as against the erstwhile restriction on purchase of only one house. These proposals came as relief to middle-class taxpayers and migrant working-class home owners who may have had to maintain two self-occupied houses for the purposes of caring for aged parents, convenience of location, proximity to workplace or schools, etc.

The interim budget also extended its support to developers and builders, by extending the period of exemption from taxation of notional rent from unsold housing units to two years from the end of construction. Further, tax benefits of up to 100% deduction of profits for developers engaged in affordable housing projects, were also extended till March 31, 2020.

The interim budget having paved a solid path for the upcoming budget, some clarity is now expected on many points of contention surrounding taxation in real estate.

For example, it is anticipated that the July 5 budget would dispel the ambiguity in the applicability of Section 50C of the Income Tax Act, 1961 – under this provision, if the stamp duty value (SDV) of land or building being transferred is over 1.05 times the actual consideration of the transaction, capital gains taxes in the hands of the transferor are imposed based on such higher SDV and not the undervalued consideration actually received. It is unclear whether the provision would apply when leasehold rights are converted to freehold, or when developers engage in exchanging transferable development rights (TDR), i.e., since TDR would possibly not qualify as ‘land’ or ‘building’.

Separately, Section 45(5A) provides for similar treatment of SDV as consideration in the context of joint development agreements. However, unlike Section 50C, Section 45(5A) does not encompass a valuation adjudication mechanism through which the taxpayer may challenge the SDV computed as consideration. Although the courts have offered their varied viewpoints on these issues, legislative clarification is a must, especially when the real estate sector is looking to recover and expand.

The same uncertainty exists in context of Section 56 of the Act, which taxes the recipient of specified property if it was received at less than stamp duty value. Another aspect on which the budget could focus would be the introduction of a comprehensive taxation regime for real estate investment trusts (REITs), which are now seen as the up-and-coming trend in the housing sector.

Industry experts believe that the government’s efforts to facilitate the ambitious ‘Housing for all’ scheme would come to fruition in the upcoming budget, including through tax sops. What also remains to be seen is whether Nirmala Sitharaman’s ministry would target diffusing the NBFC deadlock that plagues the industry.

Currently, the ministry is contemplating the grant of a 10 year long tax holiday in respect of rental income earned by developers. Homebuyers had also demanded last year that an EMI holiday be allowed in respect of those housing projects that had been delayed or stalled due to lack of resources. They had also suggested that a stressed asset fund be instituted to bail out pending housing projects. It would be interesting to see if these suggestions form part of the government’s buffet.

On June 6, the RBI threw in its lot with a rate cut, of which real estate is expected to be a key beneficiary. The SEBI had, earlier this year, brought forth changes to ease the setting up of, and support investors’ claims regarding, REITs, including the reduction of the minimum subscription limit to Rs 50,000.

With the dust caused by demonetisation, RERA and GST having settled down, all eyes have turned toward the finance ministry, where the budget could shape the seemingly promising future course of the real estate landscape.

[“source=moneycontrol”]