Budget 2017- Aims to boost affordable housing post demonetization
Bharat Sharma (Partner), Anshul Verma (Senior Associate) & Nida Bagadia (Associate)
The real estate sector emerged as the focal point of Budget 2017 (‘Budget 17’) after a gloomy year for the sector. The Finance Minister, Mr. Arun Jaitley (“FM”) while presenting the budget for the year 2016-17 (“Budget 16”), proposed various measures with the intention to provide the impetus needed by the real estate sector to reach its expected annual market size of 180 billion USD in 2020. However, the recent demonetization drive of the Government rendered the industry cashless creating an additional hindrance in the rising real estate inventory stock. This also led to a standstill of various development projects. Under such circumstances, the FM was expected to take effective steps to revitalize the current sluggish sector. The FM has met the expectations of the industry and announced various measures for promoting real estate sector and affordable housing.
The FM has stepped up the allocation to Pradhan Mantri Awas Yojana-Gramin from INR 15000 crores (in Budget 2016) to INR 23000 crores. He also announced completion of one crore houses by 2019 for the homeless as well as those living in temporary houses. The FM has also proposed the refinancing of individual housing loans of about INR 20000 crores by National Housing Bank and interest subvention of housing loans.
The FM further proposed to grant infrastructure status to housing projects, which would enable developers to raise loans at a cheaper rate in this segment, akin to other infrastructure projects.
Tax holiday to affordable housing projects have been extended to flats having carpet area of 30 sq. mtrs instead of the earlier built up area of 30 sq.mtrs. This would provide additional space under the affordable housing initiative.
In respect of immoveable properties which includes land and building, the period reckoned for determining short term capital gains has been reduced from 3 years to 2 years. The tax for short term capital gains is 30 per cent in comparison to long term capital gains which charged at 20 per cent. This amendment would encourage transparent transactions in real estate and encourage digital or cheque transactions as compared to cash transactions which is currently being practiced for evading high capital gains tax.
Another issue faced by builders and real estate developers is tax on notional value of rent in respect of unsold vacant flats. The Budget 17 has proposed that in respect of unsold flats the notional value of such flats would be deemed to be nil for a period of one year from the date of obtaining completion certificate. This, amendment allows real estate developers sufficient time to find buyers for selling the unsold houses without being taxed for vacant houses.
The Budget 17 has also proposed legislation in order to provide certainty of taxation in case of Joint Development Agreements (“JDA”). Typically, an owner of a piece of land and a builder or real estate developer enter into a JDA to construct flats on the said building. The consideration is typically in the form of a flat allotted to the person contributing the land or a flat and cash. The builder gets the balance flats and sells them on his own account. The Budget 17 has proposed to defer capital gains tax on transfer of land by the owner to the year in which completion certificate is issued to the project. This provides for a breather to the owner since he is not taxed for capital gains in the year of transfer and is taxed only upon completion of the project and when has sufficient cash or flat received as consideration from the builder. This would also ensure that the builder is not required to part with substantial payments to the owner at the time entering into the JDA and the same can be paid upon completion of the project.
The above measures would certainly encourage the real estate. Having said this there is need for a single window clearance, which would enable the developers to build projects in a timely manner and avoid delay in the delivery of homes. There is also a need to digitalize land records so to increase transparency and efficiency in this sector and this would also enable speedy disbursal of loans by the banks.
Lastly, various experts have also opined that the activity in the real estate sector over the last few years has been moderate at best. The present Government has however, attempted to take measures to revive the sector, such as Housing for All, the Real Estate (Regulation and Development) Act, 2016, tax incentives to builders/ developers etc., which is expected to boost the sector.