Six reforms the real estate industry expects in the Union Budget 2015

As the Narendra Modi-led government presents the Union Budget for the fiscal year 2015-16 on February 28, PropTiger.com lists six reforms that the home buyers and the real estate industry in India expect:

Roadmap for Infrastructure Development - As per estimates, less than 1% of the land in India is more than enough to house the whole of its population comfortably, even with the current floor space index (FSI) levels. So, why are the Indian cities crowded, and housing very expensive? One of the greatest barriers to affordable housing in India is poor infrastructure. Now, people tend to live in the cities to have cheaper and quicker access to schools, hospitals, water and sanitation. Too many people live in the city to share the infrastructural costs. If there is greater connectivity through roads and railways, and with higher FSI levels, people could easily build incomparably more affordable houses far from the city, and commute to their offices. Living far from the city is very costly for most people. The NDA government had allocated Rs 7,060 crore to build hundred smart cities across the country in the 2014-15 budget. But, for housing to be within the reach of everyone, the government should have clearer plans for infrastructural development. Until that happens, Housing for All by 2022 will remain a pipe dream. 

Lower Interest Rates - The interest rates for real estate development in India are unusually high. This is a great barrier to converting land into valuable property. The other sources of funding, like debt and private equity, aren't too promising either. The capital controls on the debt flows to India are too prohibitive. The banks and financial institutions charge homebuyers high interest rates too. The real estate players expect the government to make access to credit easier for homebuyers and developers. [caption id="attachment_6744" align="aligncenter" width="600"] In the upcoming budget, real estate players expect the NDA government to have more concrete plans to bolster the sector (Picture Credit: wikimedia.org) [/caption]

Tax Reforms for REITs - The NDA government had reformed the laws governing Real estate Investment Trusts (REITs) in the 2014 Union Budget by granting them 'pass-through' status. As REITs are likely to be comprised of shares of special purpose vehicles (SPVs) , the Securities and Exchange Board of India (SEBI) wants the government to reform the tax laws governing SPVs. If a SPV raises funds in the equity markets, they would not have to pay capital gains taxes. As of now, they are expected to pay capital gains taxes while selling units to REITs. Moreover, if REITs held the real estate assets, and not shares in SPVs, corporate income tax and dividend distribution tax would not take a toll on their earnings. The asset owners are also expected to pay minimum alternate tax (MAT) for the assets they transfer in return for REIT units. These are major hurdles. According to the norms approved by SEBI, anyone can invest in REITs with a minimum capital requirement of Rs 2 lakh. But the ticket size of Rs 2 lakh is forbidding enough. The government is likely to bring this down in the upcoming Budget. With the current taxation norms, the investors have little incentive to invest in REITs. 

Stamp Duty Reforms - Many expect the government to lower the stamp duty on property. High stamp duties are transaction taxes that harm the economy as well as the real estate sector. If the government lowers the stamp duty, the buyers will not be tempted to understate the price of property in official documents.. High stamp duties are transaction taxes that harm the economy as well as the real estate sector. If the government lowers the stamp duty, the buyers will not be tempted to understate the price of the property in official documents.

[caption id="attachment_6738" align="alignnone" width="600"] The government's Housing for All scheme aims to provide affordable housing to people who live in congested slums (Picture Credit: Wikimedia.org) [/caption]

Tax Benefits - Under section 80C, the deduction on repayment of the principal amount on home loan was Rs 1 lakh, but in the Budget 2014-15, the government had raised the amount to Rs 1.5 lakh. If the government raises the amount further in the upcoming budget, many more will be able to afford housing. 

Rental Housing - The government treats rental income as normal income while imposing taxes. This discourages real estate investors who may be keen to invest in rental housing. As the supply of rental housing is low, the rental rates are unusually high presently. This also discourages migration to the cities.

Though the regulatory framework that constrains the real estate industry in India can be easily reformed, the governments haven't done much in the past 67 years. As the NDA government had proposed favorable reforms in the Union Budget 2014-15, real estate players expect the upcoming Budget to have more concrete plans.