Since the outbreak of the pandemic in India earlier this year, the real estate sector reeling under a liquidity crunch, witnessed a flurry of challenges.
” In Kolkata, the real estate sector has witnessed a positive change in the third quarter as the unsold inventory has been almost sold. But 2021, we need to see a price correction in real estate industry, ” acording to Sushil Mohta, Chairman, Merlin Group & President, CREDAI , West Bengal.
With Indian economy poised for a big leap in the next 10 years and most of the leading rating agencies predicting a near double digit growth from 2022-23, there is a need to bolster the real estate sector that contributes 8% of the country’s economy.
” I oversee the need for ample policy support for the real estate sector to bounce back as the impact of pandemic is far reaching. The Union Budget 2020-21 should consider some of the below mentioned reforms to stimulate the sector’s resurgence in the coming months that would help the sector witnessing a northward trend compared to 2020. “
There is requirement of both demand side as well as supply side stimulus for the sector which was hit hard by the pandemic.
The demand side stimulus includes
1) Hike the INR 2 lakh tax rebate on housing loan interest rates under Section 24 of the Income Tax Act to at least INR 5 lakh to generate healthier housing demand, most notably in affordable and mid-segment housing.
2) Personal tax relief, either by tax rate reductions or amended tax slabs – The last increase in the deduction limit under Section 80C (to INR 1.5 lakh a year) was in 2014 and an upward revision is long overdue.
3) The interest subsidy for affordable housing under Pradhan Mantri Abas Yojana can be extended further for 3 years.
4) GST waiver for under-construction homes – The present GST rate on under-construction properties is 5% minus the ITC benefit for premium homes ( >INR 45 lakh) and 1% for affordable homes (
5) The GST rate on composite supply of works contract for residential real estate should be reduced to 5% with Input Tax Credit benefit. At the time of the reduction, the primary GST rate of real estate was 12% (Regular Housing) and 8% (affordable housing). Since then the government has reduced the effective GST rate on residential real estate project to 5% and 1% whereas the GST rate for composite supply of works contract remains the same. In the absence of ITC (Input tax credit) this GST becomes a cost for the residential unit. Higher input costs in the form of GST on works contracts operates against the stated policy of the government i.e. housing for all by 2022. In the absence of ITC, 12% GST on works contracts is quite prohibitive and takes the cost of a residential unit beyond the reach of a common citizen.
6) Presently the GST rates for inputs are quite high like for cement it stands at 28% and for RMC, Steel, flooring ,doors and windows, GST stands at 18% whereas electrical, plumbing , sanitary items and labour charges GST charged at 18%. Higher GST rates on these inputs for residential real estate is quite prohibitive. Accordingly, either GST rate on these goods may be reduced to 12% or residential real estate projects may be allowed refund of ITC in the form of ‘inverted duty structure’ together with refund of input services as well. These inputs are a major part of the cost of construction and there is no ITC at present.Such exorbitant rates operates against the stated policy of the government i.e. housing for all by 2022. In the absence of ITC, 12% GST on works contracts is quite prohibitive and takes the cost of a residential unit beyond the reach of a common citizen.
7) Government authorities especially Town Development Authority, Industrial Development Corporations, Municipalities allot land on long term leases for a period upto 99 years which are then used for development of housing projects. Stamp duties are also levied on the long term lease of lands of more than 30 years on same rates as sale of land. Recognizing the problem, Government exempted ‘Lease Premium’ charged by State Government Industrial Corporation and other specified entities in respect of industrial plots and other specified plots by virtue of Entry No 41 of the Notification No 12/2017-CTR.. Similar benefits should be extended to land allotted to nonprofit institutions, educational institutions, hospitals or similar institutions where outward supply is exempt from GST. Cost of land is a major impediment in setting up such institutions which provide essential services to general public. This is the underlying reason for exempting outward supply of such institutions from GST. Charging GST on already exuberant cost of land only discourages setting up such public utility facilities and operates against the government policy demonstrated by granting exemption on their outwards supply.
8) ITC on Slum Rehabilitation Projects : At present GST becomes chargeable on land plus construction cost of units, even when there is absence of any transfer of land. Slum Rehabilitation Project should be considered as construction service to society members / tenants / land owner and be charged at full rate of tax only on cost of construction and not land. Tax cost borne by the Developer on the construction service provided to SRA / Society under the SRA and Redevelopment project respectively, should be allowed as credit as the said cost is incurred by the Developer for the purpose of earning the revenue from the sale building.
9) GST on development rights for commercial development Input Tax Credit towards the construction expenses incurred for the units to be given to existing occupants without consideration.
10) Restoring Input Tax Credit Option as was existing prior to April 1, 2019 – The Revised GST scheme for residential projects effective from 1st April 2019 stipulates GST at 5% and 1% for affordable housing without providing for Input Tax Credit (ITC). Revised GST scheme has resulted in heavy increase in construction cost on account of cascading effect of GST on inputs adversely affecting demand all over the country. We suggest Govt to provide two options to deelopers. Either developers are allowed to opt for the Revised scheme of 5% / 1%(affordable housing) without availing ITC and fulfillment of all related conditions like 80/20 rule. Or the developers can avail ITC with GST rate of 12% as applicable to GST on works contract for Government contracts and PMAY (3% for affordable housing units) in serial number 3 of Notification No. 11/2017-Central Tax (Rate).
11) Cancellation/ surrender/ change of unit- The present provision on adjustment of GST in case of cancellation/ surrender/ change of unit by a buyer is not very clear. It is generally understood that such adjustment can only be done till filing of GST return for the month of September next year. A suitable amendment in the law should be made permitting adjustment of GST paid in section 34 of the CGST Act should be inserted including amendment in relevant Rules, permitting the adjustment of GST paid beyond 30th September of the last fiscal.
12) No GST for Rental Housing Development : Presently there is no provision for any exemption of GST in case of a housing built for renting out to migratory workers, students or lower income group. The government should come out with a policy for waiver of GST for projects which are built as rental housing stock, provided such developed housing stock must be used as rental housing for atleast 5 years from the date of completion. The migratory workers, students, LIG people cannot afford very high rents. Thus, if waiver of GST is allowed the cost will come down and so will the rentals.
13) CLSS subsidy : – The government has already extended the deadline for the PMAY’s Credit Linked Subsidy Scheme (CLSS) for the MIG category till March 2021. This subsidy can be further extended by another year till March 2022, not only because of COVID-19’s impact on the economy but also considering that the Economically Weaker Section (EWS) and the Lower- Income Group (LIG) have time till March 31, 2022, to avail the CLSS subsidy.
Infrastructure status : Besides the socio-economic implications of the housing sector on the economy and society, the real estate sector has a significant direct contribution of around 6-7 to per cent of the GDP. This makes it utterly important that the sector be accorded the infrastructure status and included in the priority lending list of banks. Currently, only the affordable housing sector has been granted infrastructure status. Infrastructure status for real estate will help the developers to have an access to lower cost fund
More incentives for private sector investments in affordable housing – Despite the benefit of infrastructure status for this critically important segment, developers are unable to get funding from major banks and NBFCs at affordable cost. The profit margins for affordable housing projects continue to be extremely low.
Ease liquidity – The liquidity crunch had a cascading impact across sectors, including real estate. Project delays – the biggest fallout of the cash crunch – had severely dampened buyer sentiments in the last two years. Developers need a rational capital flow to keep up the supply pipeline, especially for ready-to-move-in homes which are in highest demand – healthy. Increased supply also helps to keep property prices range bound.