Budget 2012: Strong measures will boost investment in real estate

The real estate sector contributes significantly to the Indian GDP; a buoyant sector results in cascading positive effects on the economy. The present economic environment has impacted the real estate sector in terms of higher interest costs both for home buyers as well as developers, reduced liquidity due to slower retail sales and high cost of funds. With Budget 2012 being around the corner, it provides the Government an opportunity to address the problems plaguing the housing sector to ensure better quality homes at affordable prices.

The Government should increase tax deduction for interest on loans for self-occupied property from Rs 150,000, to Rs 300,000 and the limit of deduction under section 80C beyond the existing limit of Rs 1 lakh on principal repayments of home loans. This would encourage an individual to buy a house and enable him to repay the bank loans at a faster rate. Last year, the government had extended 1% interest subsidy for home loans up to Rs 15 lakhs where the cost of house does not exceed Rs 25 lakhs. The scope of this subsidy could be amplified to include a wider price band of budget housing to benefit home buyers , especially in lower income groups. Presently, very few realty projects (especially in metropolitan cities) offer houses costing less than Rs 25 lakhs. RBI recently sought to exclude the cost of stamp duty, registration and other charges while calculating value of a property for granting home loan. RBI may have intended to curb speculation in the real estate sector by seeking to curb buyers who purchase houses for investment purposes and to ensure that the home buyer contributes a higher proportion of total cost. However, this move will hamper genuine buyers' interest to purchase a house and could result in reducing demand. The Government/ RBI should bring in measures to protect the interests of genuine buyers. The Government should endow incentives to State Government to persuade them to reduce stamp duty and registration costs. A mechanism for mitigating the cascading effect of multiple level stamp duty should be considered or the stamp duty rate for subsequent sales could be at a lower rate. While this will admittedly have tax revenue consequences , the resulting removal of inefficiencies in the system will significantly increase supply of housing stock. Government should implement provisions for Special Residential Zones to give impetus to the housing sector and bring necessary amendments to Real Estate Mutual Fund regulations to make it practically feasible and encourage an organised residential lease market . Presently, 10.30% service tax is levied on residential construction services if consideration for residential unit is received by builder partly or fully before grant of certificate of completion. The burden of such taxes is passed on the ultimate consumer. Further, rise in excise duty on cement and steel has increased the final unit cost by about 4 to 5%. To ease the price hike in the housing sector and to push up the agenda of affordable housing segment it is required that residential constructions are taken out of service tax.

It is necessary to have a balanced approach towards taxation of a sector. Even if the suggested measures are implemented, the sector would continue to contribute significantly to the tax revenues but it is important that the vibrancy of the sector is maintained and affordable supply is not constrained, as the consequential effects are significant. Owning a home is still a dream for a majority of the working class population. To make this a reality, the housing sector expects strong measures to boost investment by lowering interest rates, endowing tax incentives to buyers, mitigating the cascading effect of duties and taxes. If the foregoing measures are implemented, one can expect a direct/ indirect improvement in purchasing power of home-buyers and vibrant demand.

Source: http://economictimes.indiatimes.com/markets/real-estate/news/budget-2012-strong-measures-will-boost-investment-in-real-estate/articleshow/12121922.cms?curpg=2