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Housing sector seeks fiscal concessions

By Capital Market
June 30, 2009 12:54 IST
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UPA Govt. has committed itself to a comprehensive programme of urban renewal and to a massive expansion of social housing in towns and cities, paying particular attention to slum dwellers. It has also committed to large scale expansion of housing for weaker sections in rural areas.

Housing and Habitat Policy of Central Govt. promises wide scale reforms in housing sector, treating housing and supporting services as priority sector at par with the infrastructure sector.

Govt. in past 5 – 6 years has attempted to address a large number of issues detrimental to housing growth and provided fiscal concessions to builders and home buyers and tried to build strong public-private partnership to boost housing growth. In many ways it has paid dividend, but we are still far behind the target.

Year 2008-2009 was bad for economy as whole and real estate in particular because of global economic crisis. Real estate industry has gone through unprecedented liquidity crunch and slow down in demand because of erosion of capital and loss in confidence level of investors / buyers. Fiscal stimulus announced in December – January has given some relief to developers and buyers but there is lot to be done to pull the real estate industry out of the crisis.

Certain fiscal concessions considered necessary for the revival of the sector are proposed as under

S. No.

Existing Provisions

Suggested Changes / Modifications

Restructuring of Developers Debt: Developers are facing acute liquidity crunch and finding difficulties in servicing debts. Restructuring allowed up to June 2009 has provided immense relief.

As the recovery is likely to take more time, further restructuring should be allowed, wherever required.

Section 80 IA of IT Act exempts 100% income from infrastructure projects from income tax for ten consecutive assessment years.

Group housing and integrated township development should be brought with in the definition of infrastructure and added in explanation under sub section 4.

'Housing Sector' should be granted status of industry for all concessions, rebates and easy finances for giving proper boost to a very important sector of economy.

Section 80IB (10) of IT Act used to provide 100% exemption of income tax on income from housing projects approved before 31st March 2007.provided.

Project was completed with in 4 years from the last day of the financial year in which it was sanctioned.

Project was on a minimum plot area of one acre.

Maximum built up area of residential unit was 1000 sqft. for Delhi & Mumbai and 1500 sqft. for other places.

Build up area of shops and other commercial establishment was 5% of built up area or 2000 sqft. which ever is less.

As the exemption was available on projects approved before 31st March 2007 and this date was not extended in Finance Bill 2007, the concession on projects sanctioned after 31st March 2007 has ceased.

To generate interest of developers in LIG/EWS housing, where supply is negligible and demand huge, it is suggested that concessions under Section 80IB(10) of IT Act available before 31st March 2007 be restored and all conditions except area of residential units be removed to make it more realistic.

Section 80 C allows Rs. 1 lac deduction on various payments / deposits including principal amount of housing loan.

Rs. 2 lac should be allowed exclusively for principal repayment and limit raised to Rs. 3 lac from Rs. 1 lac.

Section 24 of IT Act

Deduction on account of interest payment on housing loans is 100% for rented dwelling units and Rs. 1.5 lac for owner occupied houses.

Deduction available should be 100% of interest for both rented as well as owner occupied houses.

In case 100% deduction is not agreed, limit of deduction should be raised from Rs. 1.5 lac to Rs. 3 lac.

Section 54 of IT Act

Capital gain from transfer of residential property if invested in acquiring one residential house is exempt from income tax.

Restriction should be removed and capital gain should be exempted from income tax if it is investment in acquiring residential property one or more.

Rental Housing

Existing rent control act is detrimental to rental housing growth.

30% deduction from housing income u/s 24(a) is available for repair, maintenance, collection and insurance etc.

Rent Control Act should be modified to make it owner friendly.

Deduction u/s 24(a) be increased to 50%. For Senior Citizens, single women and handicap it should be 100%.

Deduction for irrecoverable rent from annual value of the property be allowed.

TDS rate be reduced to 7.5% and 10% from existing 15% and 20% in cases of individual / HUF and others respectively.

U/s 36(1) (viii) of IT Act

20% of profit derived from business of providing long term housing finance is deducted from income provided it is carried to special reserve. Before 1994-95 it used to be 40% of total income and after that up to 2006-2007 it used to be 40% of income from long term housing finance.

Deduction upto 40% of profit derived from business of providing long term housing finance, as applicable before 2007-2008 should be restored. This will improve thin margin of HFCs and increase their lendable resources.

U/s 36(1)(viia) of IT Act

Deduction for bad and doubtful debts equivalent to 10% of the doubtful and loss assets is available to banks.

This should be extended to Housing Finance Companies like for banks and all the bad debts should be considered for deduction on provisions made and interest de-recognised as per the Regulators' directions. This will go a long way for the sustained growth of the Housing sector.

U/s 10(23G) of IT Act

Omitted by Finance Act 2006 wef 01-04-2007. It used to exempt income from investment by HFCs in housing projects, which were treated as infrastructure.

It should be reintroduced.

U/s 10(44) of IT Act

(New Provision)

Rental income derived by renting out residential property from 1.4.2009 would be exempt from Income-tax for five consecutive years if the built up area of the unit does not exceed nine hundred square feet. This provision would be applicable only for such residential accommodation, which is ready for occupation on or after 1.4.2009.

Other Issues

Dedicated Affordable Housing Fund.

Dedicated Affordable Housing Fund like Infrastructure Fund should be created exclusively for EWS/LIG housing and lend to developers at cheap rate of interest.

Risk Weight

Risk weight on housing loans upto Rs. 30 lac with LTV upto 75% is 50% and above Rs. 30 lac it is. 75% both for banks and HFCs but Capital adequacy requirement (CAR) for HFCs is 12% against 9% for banks.

There should be parity between banks and HFCs as far as RW and CAR are concerned.

Service Tax

Service Tax on complex services was introduced through finance bill 2005. It is an additional burden on home buyers and deterrent for housing development.

Residential housing projects should be taken out of service tax net.

External Commercial Borrowing (ECB).

Restriction imposed on ECBs in housing and real estate sector should be lifted. It will help reduce cost of fund and property prices.


Stamp Duty

Stamp Duty being charged by States is very high.

It should by brought down to 2-3% and made uniform in all States / UTs.

Real Estate Investment Trust (REIT).

Launch of REIT should be expedited. It will boost supply of fund to the sector.

The Government should amend the provisions of the Income-tax Law to provide for tax exemption on income arising to the Real Estate Investment Trusts and to the unit holder by way of Dividend.

The long-term capital gains arising on sale of REITs units should be tax exempted while the short term capital gains should be taxed at 10%.

The provisions relating to REITs and the investor in shares and Mutual Funds should be at par with the existing tax provisions relating to income of equity oriented mutual funds.

Social Housing.

Innovative housing finance strategies and policies incompassing micro finance, interest subsidy and mortgage guarantees to help poor to assess shelter and concession to private sector developers for project viability is necessary.

Incentive for Certified Green Building.

Incentive in terms of 50 % reduction in Property Tax for the certified Green Buildings from recognized institutes should be provided. This will encourage the End User to go for a Green Buildings. This will in turn encourage construction of more environmentally friendly buildings and reducing the Environmental Impacts with respect to Energy Consumption and Green House Gas emissions.

The incentive program should also allow a developer to apply for additional FSI of 5% if the project achieves a Green Building Certification or Rating. This should apply to all types of building projects, residential or commercial."

Depreciation on Employee Housing.

Higher rate of depreciation (say 30%) should be introduced on residential accommodation if built by the employer for its employees.

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