Budget 2010 well placed to deal with realty challenges
February, 12th 2010
Financial meltdown and economic crisis of 2008 affected the real estate markets worldwide, which witnessed steep decline in prices/ property value and strained liquidity/ credit positions. India, despite its strong fundamentals, was also not intact of the global crisis, which resulted in significant downturn in the Indian real estate sector. Indian real estate sector also saw a reversal of sorts with the declining affordability of the end users and reducing funding options for the developers.
However, starting mid 2009, time has been eventful for the Indian real estate sector. Government started new initiatives on the fiscal and regulatory front, which have been catapulted with price corrections, softening of interest rates, launch of affordable housing and improved liquidity. Sighting the significance that the real estate sector plays for the Indian economy, Budget 2010 is well placed in time to deal with the challenges still being faced by the sector and to adequately incentivise the sector in view of the changed economic environment.
For the past few years, one of the thrust areas of the Government in this sector has been to meet the housing requirements of the society to meet the objectives of 'shelter for all'. Further revival in the Indian real estate sector is also steered by the affordable housing segment. Considering the same, re-introducing tax benefits for development of such segment of houses will provide requisite boast to the real estate developers/ investors to pursue such projects and to pass tax synergies to the customers.
The Ministry for Urban Development is already in consultation with the Planning Commission to frame guidelines for inviting Private Equity participation in this sector. Tax incentive for such projects would definitely make investment in this sector more attractive and viable.
Further, increasing the deduction currently available with regard to interest and principal repayment on housing loans can provide impetus to the housing segment.
On the commercial real estate front, with the expected growth in tourism, including business and leisure travels, it would be essential to provide additional support to the hospitality sector. Same can be done through extending the tax deduction to all categories of hotels and in all districts and enhancing the deduction period from (current) five years to ten years.
SEZ, which were once being looked up as pioneer for Indian industrialisation are currently facing liquidity challenges, delay in commencements and so on. In such a situation, a change in tax holiday period from date of notification to date of operations will give a new boost to SEZ developers as they will be entitled to opt for ten profitable years in a block of fifteen years of operations, even if the project construction is delayed post notification.
Changes can also be brought in the service tax regulations to take commercial lease rentals out of the servies tax net or alternatively at least allowing deduction for the amount of service tax paid. Further, changes to streamline the stamp duty rates and introduction of credit mechanism for the same will be a welcome step as it will also assist to ease already stringent liquidity positions, besides bringing in more transparency.
Further eyeing India's higher GDP growth rate based on strong macroeconomic fundamentals and strong domestic demand, development of healthcare infrastructure, media and entertainment infrastructure, theme/ amusement parks, education and sports infrastructure is quintessential and contribution of real estate developers for development of such infrastructure cannot be ruled out.
Thus, sighting the relevance that these sectors can hold in India's growth story, introduction of tax incentives for development of infrastructure for the aforesaid sectors would provide adequate thrust for the requisite growth and development.
Indian real estate sector has gone through the first cycle of investments and already witnessed a boom and bust in a short span of last four years. Although demand is reviving in the residential segment, commercial real estate, like hotels, SEZ, Industrial park, which forms platform for India's growth story, are still reeling under the pressures of the economic meltdown and are witnessing delays, liquidity crunch etc.
In such a scenario, Government should make an attempt to provide a conducive investment climate for the real estate sector through appropriate and timely policy measures, as contribution of the real estate sector in capital formation, GDP and overall growth of economy cannot be overlooked.