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Budget 2014: 5 changes to improve housing and real estate sector

Comments Off on Budget 2014: 5 changes to improve housing and real estate sector   |   July 7, 2014    12:39am   |Contributed by Indian Realty News

The real estate sector has been the backbone of the Indian economy and has been a major contributor in the economic growth. The approach followed by real estate players have been instrumental in changing the face of the country, from being under-developed to accelerating its way to a developed country. The sector contributes about 6.3 percent to the nation’s GDP (2012-13) is a major source of revenue for Central, state and local governments and provides employment to more than 50 million people (along-with construction sector). It also supports about 300 ancillary industries, such as cement, steel, building material, paint and transport.

Since the opening up of the Indian economy to foreign investors in 2005, the sector has attracted more than US$22 billion through foreign direct investment; it is expected to attract US$180 billion by 2020. However, over the past few years, it has been facing several problems, such as increased land prices — the most precious and scare ‘raw material’ — funding constraints, slump in sales, numerous approvals and a significant time required to obtain them, and uncertainties on the tax and regulatory fronts.

However, there’s no denying that the sector has substantial growth potential, which is evident from a burgeoning middle class, significant high urbanization, shortage of affordable housing, proposed development of new cities and industrial corridors, signs of revival in the global economy and the corresponding positive impact on the Indian economy. The need of the hour is for the government to reform its policies for the sector and tax regulations to provide the much-desired fillip to the sector. Here are some changes that can be brought in the budget to initiate the process:

1. Service tax credit on construction activity is not available against output service tax liability on renting immovable property. Credit of input service tax paid on construction service should be allowed to avoid cascading effect of taxes.

2. Clarification on transferring of development rights: The transferring of ‘development rights’ entails transferring of rights related to land. Some states levy stamp duty on such transactions. Taxing the transferring of development rights has not been clarified under the current service tax regime. Suitable clarification should be issued to ensure that the transferring of development rights would not attract service tax.

3. Industry Status for Affordable Housing: The Reserve Bank of India characterizes the sector as ‘risky’, which deters it from accessing funds. Considering that it generates significant employment opportunities and contributes to the GDP, the sector should be given an industry status, which will help it access bank funding at better interest rates and reduced collateral values. A reduction in the base rate and repo rate would enable banks to grant loans to developers and home buyers at reduced rates, which would increase affordability.

4. Revoke the LARR Act 2013; make only landowner’s consent mandatory: mandates obtaining consent from 70 per cent of project affected families (PAF) in case of public private partnership (PPP) projects and 80 per cent in case of public projects. PAF is defined to include not only land owners but also those who lose livelihood from the land acquired. Hence, the requirement of obtaining consent of 70/80 percent PAF can be a tedious and long-drawn-out process. These provisions should, therefore, be modified to include only landowners.

Alternatively, the PAF consent limit should be reduced. Also, compensation of up to two times of the market value in urban areas and up to four times of in rural areas seems steep, considering the fact that PAF are also provided separate rehabilitation and resettlement (R&R) benefits.

5. From the perspective of Real Estate Regulatory Agency (RERA), the requirement of setting aside up to 70 per cent (state-wise threshold) of the sale proceeds in an escrow account appears to be high, considering that the cost of the land is generally between 40 and 60 per cent, depending on the state in which it is located.

Accordingly, it is suggested that the upper limit of 70 percent be reduced or states should be directed to issue guidelines to fix an appropriate cap so that the money in the escrow account is enough to meet the construction cost of a project but does not unnecessarily lock additional liquidity of developers.
The continued growth driven strategies of the real estate players, along with the support of the Central and State governments, will surely pave a positive path to take the Indian economy to the next level.

Source: ET – Neeraj Bansal, Partner, KPMG in India.

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