Budget 2018: Troubled Realty Left Waiting For Advocate Do-Little's Winning Argument

Until February 1, the real estate sector had been looking expectantly at the finance minister like a child who recently swore to his parents that he would be less naughty and make them proud. This child was quite sure his seriousness to do better in future would prompt his parents to take him in their warm embrace and shower on him some goodies, too.

The pressure has been immense on India's real estate sector, which contributes quite significantly to the country's economy, employment creation and exchequer, as policy and structural reforms in recent times have kept it grounded. Yes, we are speaking about the combined effect of demonetisation, and the rollouts of the Real Estate (Regulation and Development) Act, Benami law and Goods and Services Tax (GST). Many were of the view that the sector had taken enough beating for its past misdemeanours and ill practices, and after all the recent purging, it only needed a sound Budgetary support to spring back on its feet.

On February 1, however, Finance Minister Arun Jaitley chose to stay aloof in his Union Budget for 2018-19. Contrary to popular belief, as he walked the tight rope in the last full Budget before his government heads for general elections in 2019, Jaitley preferred fiscal prudence to populism.

Except in the brief note on “circle rate rationalisation”, the real estate sector found no direct mention in Jaitley’s two-hour Budget Speech, in which he kept switching and shuffling between Hindi and English.

"While taxing income from capital gains, business profits and other sources in respect of transactions in immovable property, the consideration or circle rate value, whichever is higher, is adopted and the difference is counted as income both in the hands of the purchaser and seller. Sometimes, this variation can occur in respect of different properties in the same area because of a variety of factors, including shape of the plot and location. In order to minimise hardship in real estate transaction, I propose to provide that no adjustment shall be made in a case where the circle rate value does not exceed five per cent of the consideration," Jaitley said.

The effectiveness of this move in reducing the “hardships faced in realty deals” is, however, questionable.

"This may not be enough as the actual deviation of circle rates to prevailing market is in many cases as high as 30 per cent, crippling transactions," BDO India Partner, real estate, Nidhi Seksaria was quoted in a PTI report as saying.

In run-up to the Budget, the sector had put forth many a wish. Here is a snapshot of some of the wishes and the Budget outcome:

* The sector was asking for an industry status. It did not get it.

* There also were demands to reduce the GST rate to bring home buying back in fashion. No such thing happened.

* The sector wanted Jaitley to do some tax tinkering with regard to Section 80C, Section 80CC and Section 24B of the income-tax Act to make home purchase lucrative for middle-class buyers. The finance minister decided to do no tweaking at all.

* Developers expected concessions for external commercial borrowings for the sector. There was no mention of that in Jaitley's Budget. 

* To make project delays a thing of the past, builders wanted single-window clearances. The Jaitley speech had no mention of that.

* Buyers as well as developers had been pitching for a correction in stamp duty rates. Jaitley's Budget evaded the point completely.

Going big on infrastructure and affordable housing, Jaitley increased the Budgetary allocation for infra by Rs 1 lakh crore to Rs 5.97 lakh crore for the 2018-19 financial year. He also spoke of the creation of an Affordable Housing Fund under the National Housing Board. These, perhaps, were the only solace India's real estate received in the Union Budget. 

Whatever indirect push the sector receives from these two measures would have to be seen as a continuation of a long chain of reforms. There does not seem to be any short-term relief in sight for the sector, even as “affordable housing continues to get preferential treatment” from the government.

The catch

Among the measures Jaitley announced, there was one that might prove beneficial for the real estate sector, albeit indirectly. After a gap of 14 years, the Centre brought back the 10 per cent tax on long-term capital gains (LTCG) made in the share market. A similar rate of tax has been imposed on distributed income by equity-oriented mutual funds. So, more investors might now turn their attention to real estate as an asset class.

 "They (investors) were trying to put investments in the stocks and get tax-free income. There was no incentive to go to manufacturing – rather, it was creating a disincentive for manufacturing. Therefore, there was a need to have a balance in the taxation system,” said Central Board of Direct Taxes Chairman Sushil Chandra. Official data show that Rs 367,000 crore of LTCG funds were left untaxed last year.

 Even if the impact will be limited, equities’ loss might turn out to be realty’s gain.