This article is part of the special coverage of the upcoming Union Budget 2018 from the lens of Indian startup ecosystem. In this pre-budget series, we’ll shed light on major expectations of the startups from Budget 2018 for various industries across all the key areas including taxation.
‘Though the Bitcoin boom last year made real estate investments look pale, but now, as the ‘Bitcoin-bubble’ is getting bulldozed by laws and regulations, ‘the best investment on the earth remains the earth’.
In the past few years, the Indian real estate startups have grown significantly – from once being an online gateway and real estate marketplace to offering co-working space and offering drone-services for real-time maps and locations.
The real estate and construction sector in India is expected to be the third-largest globally by 2030, contributing over 15% to the Indian GDP, according to a report jointly released by National Real Estate Development Council (NAREDCO) and KPMG in August 2016. It is also expected to be the largest employer in India by 2022, employing more than 75 Mn people. The market size is expected to grow to $1 Tn in 2025, making it the third largest globally.
However, recently released Economic Survey 2018 marks the deceleration in the real estate sector. According to the survey, the share of real estate sector which includes ownership of dwellings accounted for 7.7% of India’s overall GVA (Gross Value Added) in 2015-16. The growth of this sector decelerated in the last three years from 7.5% in 2013-14 to 6.6% in 2014-15 and further to 4.4% in 2015-16.
The growth of ownership of dwelling segment having a share of 6.8% in overall GVA decelerating from 7.1% in 2013-14 to 3.2% in 2015- 16. The growth of the construction sector which includes buildings, dams, roads, bridges, etc. has decelerated to 1.7% in 2016-17 from 5.0% in 2015-16.
Accounting for the second highest inflows of FDI, real estate has been adversely affected by the big triad policy implementation of the central government, in short-term.
The big-three policy initiatives are GST, demonetisation and Real Estate (Regulation and Development) Act, 2016.
Still, in its nascent age, GST has adversely affected the sector, as the tax has directly gone up from the previous 5.5% to now under 12% GST slab, inducing repercussions for the third largest employer-sector and which has consequently annoyed real estate players.
However, M Murali, MD, Shriram Properties stated,
“The recent years have witnessed some landmark reformative policies being rolled out by the government – GST, RERA, demonetisation and so on. Coming to the Indian real estate, these reforms will see the sector become more transparent, credible and attractive with only organised players on the ground.”
“Private equity investments in real estates in 2017 had already touched a new high of nearly $4 Bn. Large pension funds are having a lot of interest to enter into Indian housing market today. Finance Minister has already indicated that housing shall be high on agenda in the ensuing Budget,” he said.
Lastly, Murli added, “We anticipate this will enhance the overall quality of living in addition to job creation, a major bone of contention and a promise that the Centre has fallen short of fulfilling despite its earlier agenda of creating one crore Jobs announced in 2014.”
Let’s take a recap of the Union Budget 2017.
Union Budget 2017: Recap
One of the most significant improvement that real estate saw last year was the inclusion of affordable housing into infrastructure. This helped reduce the cost of funding for the builders which ultimately could be passed by the buyers too.
Lots of startups are now coming up offering coworking space. In the Union Budget 2017, Jaitley reduced the capital gain tax period to two years from the previous period of three years. This will help these startups to sell their property after two years of purchase, in case if the traction could not meet the target.
The Union Budget also reformed the existing notional tax on unsold but ready inventory. A real estate owner was now liable to pay the notional tax on unsold but ready inventory only after one year of the project completion. This aimed to help increase the supply of properties.
The National Housing Bank would reportedly refinance over $3.1 Bn (INR 20K Cr) loans while fund allocation for development under Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities projects were also increased to $1.41 Bn (INR 9,000 Cr).
Commenting on the government initiatives, Kapil Wadhawan, Chairman of WGC and CMD, DHFL said, “The 2017 Union Budget gave new impetus to the affordable housing sector and provided the players several reasons to cheer”.
According to him, along with assigning infrastructure status to affordable housing projects, the government also announced a slew of incentives like increase in allocation from $2.3 Bn (INR 15,000 Cr) to $3.6 Bn ( INR2 3,000 Cr) for the Pradhan Mantri Awas Yojana, extending the time period of project completion from three to five years and determining benefits based on carpet area instead of built-up area, among others.
He further added,
“All these measures are targeted at increasing access to cheaper funding for low-income groups as well as facilitate higher investments in the sector. The market also witnessed a rise in demand with new affordable housing units growing by 27% in 2017.”
The Real Estate (Regulation and Development) Act, 2016 which came into force on May 1, 2017, with full provisions directed the states in India to establish a special body to deal with the real estate matters.
The RERA 2016 made every new and ongoing project (>500 Sq Mt or eight apartments depending on the state) compulsory to register with the regulatory authority.
As per the Act, the builder has to publish the entire details of their projects on the website of the Regulatory Authority. The registration is valid for the period indicated in the project application as the time required for completion of the project. Once this period is over, the Regulatory Authority has a right to revoke the registration granted for this project.
The Act has also given the buyers the right to file a complaint with the Regulatory body if the builder or developer is not voluntarily compensating the buyer if the scheduled timeline gets extended.
In case, the regulatory authority-appointed officer does not respond within 60 days, buyers can also go to the state’s appellate tribunal over the same.
As the RERA strengthen the protection of buyers, real estate players are now looking to the government to bring certain amendments in the Act as well as taxation relief in Union Budget 2018.
Sumit Berry, Managing Director, BDI Group stated, “In the last year Budget, the affordable sector was given infrastructure status, with that we expect more for the segment to full the NDA government dream of Housing for all by 2022.”
As per him, the consumers expected consolidation of demand and over improvement in the market segment and in 2017, it was also expected that RERA will bring transparency, with GST to ease the sector, but unfortunately, both these expectations were not met.
Union Budget 2018: What Real Estate Startups Really Wants From Jaitley?
PM Modi had earlier announced plans of building homes for all by 2022 and as an aftermath of this announcement, according to BS, actions to realise it is set to boost the economy by $1.3 Tn, create 60 Mn new houses and over 2 Mn jobs annually.
Now, considering that the government has already taken some decisions and this is to be the last full-fledged budget of Jaitley in this present government, real estate startups and other players are expecting more reforms pertaining to GST, RERA, stamp duty and more.
Lower The Unpleasant GST
During the pre-GST era, real estate buyers used to pay only 4.5% service tax and 1% VAT on a property sale; however, the GST has suddenly raised the tax to 12% which real estate startups think, doesn’t fit into their pocket-size.
Expecting more clarification over GST, Pushpender Singh, MD-JMS Buildtech said, “We are going to witness India’s first post-GST, which might be the last full budget presented by the current government. The steps from the last couple of budgets have boosted buyer’s sentiments towards the real estate sector and we hope this year will further enhance it.”
He claimed that the assigned GST rate for the under-construction properties is 12%, which is higher than the previous taxes. The real estate sector expects a strive to make GST a tax-neutral proposition so as to help people associated with it and according to him, there is also a recommendation that stamp duty should come under the ambit of GST which increases the overall price of the property.
Stamp Duty Adds The Burden Further
A number of reforms have been taken; but the shifting isn’t smooth as it was expected to be, complains real estate players. Since the GST is high, they want stamp duty to be decreased.
Speaking of the budget, Vineet Relia, MD of SARE HOMES commented,
“Real estate is witnessing a challenging time presently, therefore, we are very hopeful for some measures that will bring relief to the sector. With the Union budget around the corner, the sector expects a decrease in the Stamp Duty as it increases the overall cost of the property.”
He further added, “Section 80EE of the income tax Act, works in favour of the first time home buyers as it provides an added tax benefit of $785 (INR50,000) on the home loans sanctioned during the financial year 2016-17, which should be extended this year as well, to refresh buyer sentiments. The sector is also expecting more clarification in terms of rates relating to GST for various properties including under construction.”
Jaitley Yet To Impress REITs
Despite a string of measurements and amendments announced by Jaitley last year, the REITs seem to remain unimpressed so far, as the investments by REITs has not gone up as expected.
According to a Finance Express report, “Specific exemption should be introduced in section 47 to exempt transfer of assets held by the developer to REIT, from capital gains tax. The holding period for a unit of the REIT to qualify as a long-term capital asset should be more than 12 months (and not more than 36 months) given that character is akin to equity in nature.”
“Along with the expectation of allotting real estate an industry status, single window clearance, reduced cost of land, lower rates of interest on borrowings should be implemented. A push from the government is required for wide-scale proliferation of these objectives for cost reduction in real estate development,” the report claimed.
Along with the reduction of GST from the existing 12% to 6%, Amit Kumar Agarwal, Co-founder, NoBroker made a number of suggestions which are:
- Tax deduction bracket on interest payment of property should be increased from the existing two lakhs.
- Affordable housing to get a boost. More houses to be brought into the ambit.
- SOPs for first time home buyers should be increased
- Smart Cities may reduce pressure on metros. Need to create infra and job opportunities in these cities.
- Tax deduction for under construction houses.
- Need pool of rental houses to support urbanisation. REITs allowed at par Long Term Capital Gain for the investment to come through.
Reminding of the jolts given to the vertical’s stakeholders, Ravish Kapoor, Director, Elan Group has demanded that some incentives must be given this year.
He stated, “To further promote the sector, incentives should be given to the first time home-buyers which will definitely promote the real estate segment, in the long run, bringing smiles on the faces of the people associated with it. The focus should be given to the supply of ready-to-move-in properties as the developers are seen focussing on completing their existing projects.”
Despite the GST, demonetisation effect and RERA implementation, coworking space has registered a huge phenomenal growth last year.
Sudeep Singh, co-founder and Chief Evangelist at GoWork stated, “The Indian coworking industry has seen a phenomenal growth in the year 2017. Coworking has become a thriving ground for start-ups and is encouraging their growth within its ecosystem.”
According to him, “To make this growth upbeat and continuous, we look forward to furthering developments in the government’s smart cities initiative, as occupiers are looking for improvement in infrastructure in these cities to be able to make a move towards Tier II and Tier III cities.”
He further stated, “Keeping in mind that startups do not make a profit in their primary years, the government can rather lower the income tax slabs for startup employees which will aid startups to reduce costs. This year, we look ahead to some important tax exemptions that would give an enhancement to all existing and upcoming startups.”
In a country of billion with limited income from few lakhs of taxpayers from few sectors, caught in between the reforms-way and year-end general election results, it is no secret that FM Arun Jaitley has very limited space to keep the reforms continue further.
Also, real estate has been a significant contributor to the country’s GDP, it is unlikely that Jaitley will reduce the GST for real estate as all the other sectors too such as textile, Gems and Jewellery, etc. continue to demand the reduction of GST. However, we might expect some reform in terms of other low hanging fruits such as stamp duty.
Speaking of the development, Amit Ramani, founder and CEO of Awfis appeared assured,
“In 2018, the office and retail sector is expected to show higher returns in the Indian real estate sector. Institutional investments in the commercial real estate will be on an upsurge and shared workplaces will continue to grow with flexible leasing structures.”
He concluded, “With the government setting up ambitious targets with initiatives such as the Startup India, we are sure that the Indian startup ecosystem will revive the demand for investments to generate jobs and accelerate India’s economic growth.”
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