How Demonetisation, RERA, GST Affected Real Estate Developers In 2017

It would be an injustice to say real estate developers in India had a challenging time during 2017. A more appropriate word to describe their situation would be taxing, apart from it being challenging. Do these words seem similar to you? But, they aren't! According to the Oxford Learners Dictionary, challenging is more of a positive word – something that is difficult in an “interesting way” and that “tests your ability” is challenging; on the other hand, taxing is a word "often used in negative statements", standing for something that is "difficult to do" and that "needs a lot of mental or physical effort". Thanks to the arrival of long-pending reformatory and game-changing legislations, everything went topsy-turvy in the world of India's real estate.

D for demonetisation

Right before the start of the year 2017, the government on November 8 rendered illegal about 86 per cent of the in-use currency through demonetisation. This move, aimed at curbing the use of unaccounted money (of black money, if you please!), caused a great deal of trouble to those who have been using nothing but accounted money (or, white money, if you please!). The short-term writhing pain felt by many, including developers, was nothing but tremendous. The resale property markets felt the pinch most intensely.

Putting a name to it

Earlier in the same month, the government brought into force the Benami Transactions (Prohibition) Amendment Act, 2016, after a wait of over 28 years. Under the provisions of the law, a benami property will be attached and subsequently confiscated. Apart from that, a jail term of up to seven years can be imposed on the beneficiary. A beneficiary might also have to pay as much as 25 per cent of the market value of the property as fine. An abettor, on the other hand, would face a rigorous imprisonment of six months to seven years for providing false information. An abettor will also be liable to pay 10 per cent of the market value of the property as fine under the provisions of the amended law. The arrival of this reformatory law also had a bearing on home sales, further diminishing the profit margins of sellers.

The status update

However, in the Budget 2017-18, Finance Minister Arun Jaitley made certain announcements that would lift the spirits of the developer community. Reacting to it, Supertech Chairman RK Arora said the Budget had the potential to give the “much-needed impetus” to the affordable housing sector.

“The developer community appreciates that the government is serious in achieving the objective of the Housing for All by 2022 Mission which is evident from the grant of an infrastructure status to affordable housing. Further, the permission to complete affordable housing projects in five years instead of three to qualify for tax exemption under Section 80IB is a relief.

Another positive step that would revive the real estate was additional refinance of Rs 20,000 crore through the National Housing Bank, Arora said.

“The benefit to individual taxpayers by raising exemption limit and slab restructuring benefit would also boost purchasing power and demand. The relief in capital gains tax on real estate properties announced in the Budget is a welcome step as it would help enhance investment as well as demand in real estate sector,” Arora further added.

Rules of the road...

Three months later, the Real Estate (Regulation & Development) Act, 2017, came into force. Quite worked up, states started the implementation process. The year is about to be over, but, several states have yet to put in place the basic infrastructure for the Real Estate Regulatory Authority to deliver justice to homebuyers, the primary thing the legislation promises. In the middle of all this chaos, developers are at loss to understand what the way forward is while struggling to remain in the business at the same time.

"Many states have not yet started resolving customer grievances under the Act, or, have not come up with an effective website. Such delays will hold back revival of customer confidence in these states," a report by PropTiger DataLabs said while making its forecasts on the performance of the industry in the third quarter of the current financial year.

...Tricks of the trade

While developers were drowning in the sea of confusion over the real estate came along with the Goods and Services Tax (GST) in July. With much fanfare, the government brought into force the one-nation-one-tax regime into force, tagging the GST the biggest tax reform in the history of the country. We are about to enter the year 2018, and looking at the speed at which things are moving, it would be safe to say we might be a long way from receiving the benefits promised under this law as well.

Earlier, the sector was brought under the purview of the new tax through work contracts. The government is now considering bringing the sector directly under the GST.

"The one sector in India where the maximum amount of tax evasion and cash generation takes place is real estate and which is still outside the GST. Some of the states have been pressing for it. I personally believe that there is a strong case to bring real estate into the GST," Jaitley said in October. A final call on the matter has yet to be taken. Little wonder there is no subsiding of the confusion!

“Effective rate of 12 per cent of the GST has been a dampener for the under-construction property buyer as developers have not been clear on input tax credit,” the report said.

On expectations of future clarity and more affordability, prospective homebuyers are holding on in the meantime. Numbers available with PropTiger DataLabs show home sales declined 18 per cent while new launches fell 53 per cent in the second quarter of the financial year 2017-18 when compared to a year-ago period. Inventory overhand also increased to 42 months from 35 months in Q2 FY17. This, despite the Reserve Bank of India bringing the repo rate to record low, and banks vying with one another to offer the lowest home loan interest rates to borrowers.

The state of shock

So severe has been the impact of the downturn in the market that several sector biggies are now facing insolvency proceedings. The high-profile cases of Jaypee, Unitech and Amrapali do nothing but instill a sense of fear and apprehension in the hearts of homebuyers as well as developers.

Coming back to life

Sector experts are of the opinion that the weather might start improving from hereon. Those developers who have been able to survive the combined effect of all the changes would emerge victorious. Let us hope the New Year would be a year of new starts for the developer community where they can afford better clarity as far as legislations are concerned and more confidence as far as the buyers are concerned.

In 2017, Realty Re-Wrote The Survival Of The Fittest Story

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