_Knight Frank Budget Expectations 2022

Summary - Budget 2021

Some of the key areas that Budget 2021 focused on were Physical and Financial Capital and Infrastructure, Innovation and R&D, Inclusive Development for Aspirational India, Minimum Government Maximum Governance, Reinvigorating Human Capital, and most importantly Health and Wellbeing, considering the pandemic situation. Let’s look at these decisions pertaining to the real estate sector.

o   Housing projects to avail tax benefits for up to March 2022 with interest exemption for up to Rs. 1.5 lakhs for
      affordable homes

o   Rs 20,000 crores proposed to capitalise DFI (Development Financial Institution)

o   217 projects worth over Rs 1 lakh crore under the National Infrastructure Pipeline

o   Proposal to exempt dividend payments from TDS to REIT/ InvIT (Real Estate Infrastructure Trusts or Infrastructure
     Investment Trusts

o   Enable debt financing of InVITS and REITs to benefit foreign investors

o   Increase the safe harbour limit for the primary sale of residential units from 10% to 20%, to be able to help
     homebuyers as developers had to liquidate their unsold inventory at a price less than the circle rate, applicable only
     up to June 30, 2021.

o   Form an Asset Reconstruction and Asset Management company for consolidation and taking over the existing
     stressed debt, with a view to helping projects stuck due to long term debt financing

o   Construction of 8,500 km national highway corridors by the end of March 2022 apart from expressways like
     Mumbai-Kanyakumari corridor, Bangalore-Chennai expressway, Delhi-Mumbai expressway, Kanpur-Lucknow
     expressway, Delhi-Dehradun Economic corridor, and a few more

o   Improving metro connectivity with projects viz. Chennai Metro Railway Phase 2, Bangalore Metro Railway Phase 2A
     and 2B, Nashik Metro Rail, Kochi Metro Railway Phase 2, etc. 

Budget 2022 - Key issues & Possible Solutions

Real estate, being amongst the largest contributors to India’s GDP and the second-largest employer in the country, drives over 200 industries right from manufacturing to services. Any incentive extended to real estate can also stimulate all the ancillary industries. Despite an adverse impact by the onslaught of the pandemic, an improved sense of homeownership and some state government incentives have rekindled the demand.  However, the prolonged pandemic implies that the sector will require support to chart a sustained recovery.

Here are a few suggestive measures to serve the cause of stimulating the real estate sector and revive India’s economic growth while maintaining a fine balance on its finances.

Issue 1:  Mounting construction cost restricts residential price flexibility and keeps demand comparatively suppressed.

Solution: Allow Input Tax Credit (ITC) to reduce the tax burden on developers.

Currently, GST applicable on under-construction residential units is 5% and that on affordable housing is 1%, without ITC. No GST is charged on completed units. GST on cement and steel are 28% and 18% respectively and the tax outgo has spiked along with the rise in these commodity prices. As the developers cannot claim tax credits for GST paid on input items, the amount gets added to the construction cost, leading to higher prices for homebuyers. Further, it also negates the purpose of GST which is to remove cascading impact of taxes. If ITC were allowed, tax savings would be substantial and allow developers the room to lower prices.  The government can use this budget session to assuage the concern and assure for restoration of ITC in the upcoming GST council meet. The government should also look at reducing the GST rate on cement to give a boost to construction activity in the economy.

Issue 2: Retail and Hospitality businesses severely impacted by the pandemic.

Solution: Losses incurred during FY 2021 and FY 2022 by Retail and Hospitality businesses should be allowed to be carried forward till FY 2024 to set off against profits during this future timeline. Alternatively, 100% Income Tax exemption should be provided for the same period.

The retail and hospitality sectors have been the worst impacted due to lockdowns as travel restrictions and social distancing norms were necessitated by the pandemic. Intermittent opportunities to resume business during the past year only hurt their finances more as they had to commit significant investments to make their establishments ready, only to be shut down again as pandemic fears resurfaced. These businesses provide huge employment opportunities and have great potential if they are supported during these turbulent times, hence tax breaks are recommended for the specified period.

Issue 3: Affordable housing project registration deadline to avail tax holiday under Section 80IBA has lapsed.

Solution: Section 80IBA registration timeline extension by 12 months

The 100% tax holiday for affordable housing projects under Section 80IBA is available for projects which are approved till March 31, 2022. This section allows developers to claim 100% tax exemption on profits subject to several qualification criteria including the approval deadline. COVID-19 has delayed the registrations process and projects that would otherwise have registered on time, might not be able to make the registration deadline. Since this is arguably the most materially meaningful measure to boost the viability of affordable housing projects, we believe it is important to extend the project approval deadline.

Issue 4: Affordability is the biggest catalyst to homebuyer demand

Solution i: Focused tax deduction on principal repayment of housing loans (Section 80 C)

At present, Section 80 C of the Income Tax Act does not provide for a focused benefit on housing which is the largest and most important expense item for most taxpayers during their lifetimes. Taxpayers have numerous investment alternatives to choose from and the lack of exclusive tax benefit on the principal amount of home loans makes consumers indifferent towards a house purchase. A separate annual deduction of INR 150,000 for principal repayment will improve housing affordability and provide the much-needed fillip to opt for home loans.

Solution ii: Hiking home loan deduction limit under section 24

Section 24 currently allows for a deduction of INR 2 lakh on housing loan interest. This needs to be extended to INR 5 lakh to boost affordability and housing sales.

Solution iii: Establish city-wise ticket size criteria for affordable housing to factor in local market realities

Currently, an affordable housing unit cannot exceed a carpet area of 90 sqm in non-metropolitan cities and towns and 60 sqm in major cities. In both cases, the cost of the unit cannot exceed INR 45 lakh. While these criteria are appropriate for cities where there is sufficient housing inventory available within the area and cost limits, they leave homebuyers in the more expensive cities such as Mumbai with very few options. Developers are also forced to increasingly reduce individual unit sizes to qualify under these criteria and similarly, buyers also must submit to this status quo despite the obvious inadequacies that this small residence comes with. The ticket size criteria need to be increased to at least INR 80 lakh in a city like Mumbai so that a larger proportion of the population can take advantage of this provision.