Looking for stimulus

Looking for stimulus
The Times of India, Times Property, June 20, 2009, page 1

The realty sector has demanded some big-ticket fiscal incentives in the coming Budget to lift the sector out of the current slump, writes Prabhakar Sinha

The Budget was losing importance of late as the economy was on an auto mode, growing at around 9% for five years in succession, prior to 2008-09. But the global slowdown has changed all that, making industries world over look towards their governments for help and stimulus packages. No wonder that the coming Budget will be one of the most important events for the industry in the recent past. Every industry, from export units to real estate, is looking for some packages from the government to regain the high growth path of the recent past.

The real estate sector in particular was very badly bruised by the global financial crisis and is looking for some tax concessions from the government so that demand for housing revives. Real estate sector is a major employment generator - second only to the agricultural sector - in the country. “This Budget has given a historic opportunity to Indian government to give the much needed boost to real estate sector, which has been facing various bottlenecks, and it is time to set t h i n g s right,’’ says Shruti Gupta, head of real estate consultancy firm Hamptons International, India.

Sanjeev Srivastava, CMD of Ass o t e ch group, echoes Shruti and says the sector is expecting an encouraging announcement in the Budget so that the activities could pick up, which is also necessary for the turnaround of manufacturing sector.

Section 80-IB (10)

The reintroduction of Section 80-IB (10) of Income Tax Act in the coming Budget is high on the wish list of developers this year. This section caters to the exemption of income tax on the profit made by developers in constructing small houses of less than 1,000 sq ft in Delhi and Mumbai, and less than 1,500 sq ft in other cities. The provision lapsed on March 31, 2007.

If this provision is reintroduced, the construction of small-size apartments will get encouragement. Council of real estate developers, NAREDCO in its pre-Budget memorandum to the finance minister said there is a huge demand for smaller houses in the country, which requires a lot of private investment. But as the real estate industry is passing through unprecedented slowdown, there is an urgent need to boost housing activity by restoring fiscal concessions available before 2007 under Section 80-IB (10). Also, since a large number of projects sanctioned before March 31, 2007, which were to be completed in four years from the end of financial year in which they were sanctioned to get the tax concessions, have not been completed due to liquidity crunch and fall in demands consequent to economic slowdown, it is necessary that the four years period for construction be increased to six years to take care of prevailing extraordinary economic conditions.

To generate interest among developers in the construction of small houses, where supply is negligible and demand large, NAREDCO demanded reintroduction of concessions under Section 80 IB (10), as available before 2007. Developers feel this measure will also help in lowering the prices of small residential units.

Section 24

Apart from developers, even the urban development ministry has demanded an increase in the deduction from the taxable income on account of interest payment on housing loan, from Rs 1.5 lakh to Rs 3 lakh under Section 24. Under this section, deduction on account of interest payment on housing loans is permissible up to Rs 1.5 lakh for a self-occupied house. Also, the deduction is available after acquisition or construction is completed in three years from the end of the financial year in which capital was borrowed.

NAREDCO in its memorandum has suggested the deduction on account of interest payment available under Section 24 should be made applicable from the year in which capital was borrowed and should be to the extent of full interest paid at least in respect of one house. In case this is not agreed, at least the limit of Rs 1.5 lakh should be raised to Rs 3 lakh for owner-occupied houses. Also, three years period for acquisition/completion from the year of borrowing should be dispensed with. This will provide much needed impetus to housing sector, which has been badly impacted by recession.

If the deduction is allowed on the entire interest pay out on the housing loan, the effective interest rates will be reduced by 2.5 percentage points to 3 percentage points. That means, your home loan rate of 10% will come down to 7%.

Developers also demanded the government should take special measures to cut the interest rates on home loans. Despite reduction in rates in the recent past, the current rate of interest on home loans is around 9.5%. Developers feel the rates should be brought down to 7%. Reduction in the interest rates increases the affordability of the end users and particularly in the lower-income families. This will lead to increase in the demand and will help in the revival of the sector.

Section 54

At present, capital gain arising from transfer of any capital asset is exempt from tax in cases where sale proceeds are invested in acquiring one residential house. Such a restriction, NAREDCO says, is a deterrent to the object of boosting housing sector, and wants it removed and the scope be broadened by allowing the exemption as long as the entire capital gain is invested, whether in one or more houses.

Incentives for promoting rental housing

Tax on rental income: In view of the housing shortage in the country and meeting the objective of providing shelter to all, NAREDCO says availability of houses on rents should be promoted. “In a situation when all cannot afford ownership housing, we need to give a big boost to ‘Rental Housing’” it said.

For this, NAREDCO suggested a number of measures:
1. Income from renting of properties be taxed at a flat rate of 10%
2. Depreciation allowance of 50% be allowed on investment made by employers in e m p l oye e housing. Such depreciation should be 100% in case of e m p l oye e housing with plinth area of less than 500 sq ft.
3. Deduction from rental income for the calculation of taxable income under Section 24 be increased from 30% to 50%.