Advertisement
Home ArticlesSpecial Articles

Budget - A Challenge For Real Estate Sector

Budget - A Challenge For Real Estate Sector

In the finance bill 2017, two amendments proposed in budget that concern Real Estate sector reflect serious shortcomings. These two amendments give an impression that the force to make such amendments is driven by mere urge for tax collection rather than welfare of real estate, a vital sector.

Budget is a policy statement, prepared for driving an economy forward. But these two provisions might cause serious hardship and have critical consequences both on supply and demand front of already languishing Real estate sector.

It is a well-recognized economic theory that a nation’s economy acquires boost from real estate sector as it impacts core sectors involved in overall growth of economy.

The successive Governments have conceded inability to meet huge demand of housing, both residential and non-residential and realized imperative need for participation from private sector to overcome the issues that haunt the growth in the real sector.

Several Past budgets, in line with above philosophy, gave thrust to this real estate sector by various incentives, interalia, granting specific tax relief under the Income tax act, witnessed through conducive provisions since the financial year 2000 until 2012. Real estate sector, on its part, has reflected growth with these measures.

In the last few years, slowing economy coupled with Demonetization of 2016, practically stymied the demand resulting in strangling the capital of real estate sector, bulk of which is in form of non-moving realty stock.

Overall, the sector is bleeding with inoperable and hostile economic conditions, with consequent impact on core manufacturing industry as well as threatening banking industry with growing NPA.

The need to ensure growth in this sector by continued participation by private enterprise is critical at this stage. Government should extend suitable supporting measures. Apart from economic angle, Indian psyche is skewed towards owning at least one more house, and that has contributed to growth in demand to augment supply of realty on rent.

For the ailing realty industry, instead of being provided with succour, lifeline is being taken away by this budget. If one tries to read Government mind from budget proposals, obligation of government to stimulate demand in real estate is confined to encouraging to build Houses of less than 60 sq meters carpet area which works out around 800 square feet.

Further to this anomalous situation, Government appears to have overlooked presence of Middle income group that was recognized its existence (1500 square feet built up area) until 2012, though the demand from such band is critical for growth of industry as can be witnessed from beneficial incentivised provisions existent under law contained in section 80 IB (10), abruptly a swift u turn took place, as if there is no such band for demand in real estate and in Indian economy. This U turn of Government is unwarranted and is a retrograde in nature.

The Indian emerging economy is full of such band with growing income living standards demanding  housing with better facilities and improved build up area.

Many business houses have sunk huge investments in promoting modern gated communities inspired by the Government’s incentive provisions. Government’s move to play with a different tune would suffocate the plans of these realty companies.

As per clause 12 section 23(5), annual value of property of a real estate owner arising out of a housing project is made liable to tax on par with a let out property.  

In nutshell, the annual value of a finished house held as stock in trade, suffers tax even though it is unsold and remain placid. Income tax department disputed with realtors that stock that remain unsold after completion of housing project is liable to be taxed under the head property income.

A relief (sic) is granted by this finance bill, stating that unsold property for a period of one year after completion will not suffer this liability. After which, the annual value will be liable to tax. The taxman’s outlook appears to be misconceived and inconsistent with real economic situation.

The inability to sell the stock already pulls down the real estate business’s capital capacity. Imposing tax on notional basis is not only damaging but also a treacherous device to kill enterprise.

Adding to agony on principle front, in the practical front, of commercial economy, the realty business is stuck with huge unsold stocks from the more than a year. At this the stage, i do not deem be either proper  or fit for  taxman to fix  up his stand on a firm and sound footing, to levy tax. In fact, the law should be benevolent, not bring that unsold stock to come under tax lense. Probably it would be fair if such stock in trade is  converted from Stock in trade to investment.

Any wise taxman can easily understand economic reality and will not cause undue hardship to any industry that is bleeding. Let us hope finance minister, in final budget, drops applicability of section 23(5) to stock in trade of real estate business without any latches. The option to levy tax on stock in trade converted into investment can always be exercised.

The second issue concerns Clause 31: Section 71 i.e. Restricting set of loss from property to Rs 2 lacs against other heads of income. With this retrograde provision, government is taking away appetite and ability of investment potential of income earning youth thus restricting the flow of investment in realty sector. I am unable to find justification and rationale for this move than mere apprehension and accusing occurrence of abuse.

With due respects, the witch hunt should not hurt an honest planner embarking on realty projects with induced  invite from government through incentivised provisions. Both recognition of demand & necessity of the  band of 1500 square feet built up area in housing sector and continuity of incentive to save the realty industry that is reeling under the pressures of economic downtrend, are necessary.

Unless Government provides a breather, it is certain that  the chronic corners of financial collapse will suffocate and strangulate the  realty sector. 

Let us hope Finance minister drops this proposal to amend the provisions of section 71 to protects in flow of investment into real sector coupled with raise in demand. Alternatively, the proposed restriction of limit of Rs 2 lacs can be enhanced to Rs 5 lakhs such that middle income group poised for growth in their economic status can contribute for growth of economy through investments in the realty sector.

P. JITENDRA KUMAR
Chartered Accountant

RELATED ARTICLES