Affordable Housing: Will Tax Waivers Make Construction Unusually Profitable?

Housing at present is not affordable in major Indian cities, thanks to exceptionally high taxes on real estate development. Prices of land and raw materials used in housing are also high; these further add up to expensive housing. More importantly, because of restrictions imposed on height of buildings, the cost of land is high enough to make the construction of low-cost housing units difficult. Here is an example: If a developer is allowed to construct only 1,000 housing units on a 100-acre plot costing Rs 10,000 crore, he should be able to sell each apartment for at least Rs 10 crore to recover his investment.

Building troubles

While developers are often blamed for not building enough low-cost units, it is improbable that they would refuse to serve an important market need, so long as there is enough demand. The fact is that it is quite expensive to build low-cost housing units on highly expensive land parcels. Developers point out that 30-35 per cent of the cost of housing is in the form of taxes paid at every stage of the process, including stamp duty. So, even if other costs remain high, lowering taxes will go a long way in making housing more affordable.

The move

In the Union Budget for 2016-17, Finance Minister Arun Jaitley has proposed a 100 per cent waiver of income tax for housing units, if these are smaller than 30 square metres in one of the four major metropolises, or and smaller than 60 sq mt in other cities. This is expected to make housing more affordable than it is now.

Why?

Real estate developer Niranjan Hiranandani once said that before 2008 houses smaller than 1,000 sq ft were exempt from income tax under Section 80 (I) B; this played an important role in lowering the cost of housing. The tax waiver proposed in the Budget is likely to play a similar role.

There is more to this. Developers are often strapped for cash. To expand their operations, they need funds. When a significantly large fraction of their profits goes into paying taxes, it will be more difficult for them to invest in large-scale, economically efficient projects. It will also be more difficult for them to engage in large investments that lower the cost of housing in the long run.

Their defence

Many argue that the 100 per cent waiver on taxes for small flats will lead to developers making huge profits. In expensive parts of Mumbai, for example, it is easier for developers to sell a 30 sq mt flat for crores of rupees, claiming that these are affordable housing units. Nothing in the existing laws prevents developers from doing so. Some of the critics of the policy argue that a single household may buy many flats in such a project and join them later.

Even if we assume that such cases are likely to happen, the effect is unlikely to be statistically significant in a large country like India.

Highly expensive land in cities like Delhi and Mumbai are a small fraction of India's land. India has nearly 300 cities and many districts, towns and villages. The effect such a policy would have on affordability of housing in much of India would be great. Besides, developers and home buyers often break down walls between houses and cut corners. If it is easier for people to build legally, it will encourage fair practices. A large section of the population in large Indian cities lives in illegal settlements because there are not enough provisions in law to construct low-cost houses legally.