Grant priority sector status to housing industry

Grant priority sector status to housing industry
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First Published: Thu, Feb 21 2008. 05 37 PM IST

Deepak Joshi, associate director-tax and regulatory services, Grant Thornton India
Deepak Joshi, associate director-tax and regulatory services, Grant Thornton India
Updated: Thu, Feb 21 2008. 05 37 PM IST
Deepak Joshi, associate director-tax and regulatory services, Grant Thornton India
The importance of the Indian real estate sector can be gauged from the fact that it is the largest employment generator in the country after agriculture, and a single component within the industry — housing — contributes roughly 5% of India’s GDP.
This sector is witnessing a phenomenal compounded annual growth rate of around 30% and is therefore strategic to India’s economic progress. Consequently, the sector requires further impetus for continued growth and the Finance Ministry has an important role to play in this respect, particularly with the 2008 Budget round the corner.
Some aspects relating to easing liquidity, reduction in home loan rates, income tax sops and reduction and rationalization of stamp duty rates need particular attention and the industry is hopeful that the Finance Minister will bring due cheer by addressing them in the 2008 Budget.
On the supply side, it is the real estate developers who have been facing a squeeze in availability of funding for real estate projects. Some aspects that could address this concern have been discussed below.
External Commercial Borrowing
An External Commercial Borrowing (ECB) is defined as a commercial loan obtained from a non-resident having a minimum average maturity of three years. As per the current ECB regulations, overseas investment in any instrument that is not mandatorily convertible to equity — such as redeemable preference shares, optionally or partly convertible debentures — is regarded as ECB.
At present, ECBs are permitted only in the ‘Real sector-Industrial Sector’ and are specifically not permitted in real estate projects other than industrial parks and urban infrastructure. This has restricted the availability of funds for the sector and the following measures may be considered in this regard:
• ECBs were specifically permitted for investment in Integrated Townships till May 2007 when this benefit was removed. Since Integrated Townships promote overall development of a geographical region, reintroducing this benefit may be considered. Extension of the benefit to other segments of the sector that are critical to the development of the economy, such as low-income housing should also be considered;
• There is currently no clarity on whether ECBs are permitted in hotels and Special Economic Zones since the scope of ‘Real sector-Industrial sector’ has not been explained. A clarification should be issued in order to remove this ambiguity.
Bank finance
• RBI has specified an enhanced risk rating for bank loans to real estate developers and a certain degree of relaxation in their criteria can help ease liquidity pressures. One manner of achieving this could be by treating the housing industry as a priority sector for lending purposes with a substantial reduction in interest rates for home loans/ project finance as well as financing land acquisitions.
• Banks today are not permitted to lend for purchase of land and this aspect could be examined.
Individual perspective
On the demand side, the existing benefits/tax breaks being provided to individuals currently relate to interest on loans and payment of instalments. The cap on the rebate is relatively low and needs to be commensurate with the level of existing expenditure to acquire real estate. Some aspects that can address this concern would relate to the following:
• Income on rental from houses located in areas such as suburbs of large metros/ heavily populated industrial towns and having with a size below a specified limit (which could be 1,000 square feet) may be considered for exemption from income tax. Alternatively, rental income from such houses may be considered for exemptions from income tax for an initial period (say the first five years and at 50% for the next five years)
The above measures would increase investment of savings by individuals in low-income housing and this would reduce the requirement of Government funding for such projects;
• Investors in the low-income group (let’s say with an annual income not exceeding Rs5 lakh) may be allowed a flat 20% rebate from their income tax liability for a specified period of five years. Thus the current ceiling of Rs20,000 on rebate from income tax towards repayment of housing loan specified under Section 80C would not be relevant for such investors;
• The current ceiling of Rs1.5 lakh per annum towards deduction of interest on home loans in case of self-occupied properties would also need substantial upward revision.
• On the cost side, stamp duty, which presently ranges between 6-16% (depending on the state in which the property is located) needs some attention. In this respect, there appears to be a need for a credit mechanism since there is a cascading effect of stamp duty right from purchase of land by the developer to sale of the property to the final buyer. A possible solution could be an input credit system (similar to service tax) for stamp duty paid on land against the output stamp duty on sale of property.
These measures will have the dual benefit of increasing the supply of housing for the mass segment (thereby making it more affordable) while providing a fillip to the real estate sector on the demand side as well.
The author is associate director–tax and regulatory services, Grant Thornton India
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First Published: Thu, Feb 21 2008. 05 37 PM IST