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Budget 2019-20: Bane or boon for the Indian Real Estate?

As expected, like any other Union Budget, this year too the 2019-20 Budget evoked a mixed reaction. While a section went euphoric citing it to be ‘revolutionary’ the other lot had lukewarm to indifferent reaction.

With its varied response, the Indian real estate sector was no different. While the budget did manage to bring a smile on the faces of affordable home buyers, on the other, it has also evoked mixed reaction from another section.

So how has the budget impacted the Indian real estate market? Has it been favourable or unfavourable?

Broadly speaking, the real estate sector which is currently sluggish will benefit from the budget. However, the industry experts feel that the government has failed to address some major concerns.

As we know, Demonetization had a crippling effect on the real estate sector. Not only it impacted its growth and the rate of purchase, but changed the paradigm of property buying where property was treated as a mode of investment.

Where the new properties saw a downfall by up to 40 per cent in metropolitan cities, the new projects, on the other hand, witnessed a fall of up to 11 per cent. Construction work too got affected resulting a standstill in many under-construction units.

However, the affect remained for few months only and the sector picked up its pace slowly and gradually. The interim budget trailer pointed towards a blockbuster movie but it scored slightly above average.
Let’s check out how fair the Union Budget 2019-20 have scored for the real estate sector:

Rental Housing

The Union Budget 2019-20 throws a light on the new model tenancy act that will help in clarifying the fair relationship between the lessor and the lessee. The new law will hopefully boost the rental market and will contribute in strengthening and streamlining the same.

The proposal to increase the TDS exemption limit for rental properties from ₹ 1,80,000 to ₹ 2,40,000 per year. Complete details on rental housing will soon be circulated to the states as it is finalized.

Affordable Housing

Taking a big leap, the budget earned a lot of appreciation countrywide for making affordable housing more affordable. Focusing more on the central government’s pet scheme – Pradhan Mantri Aawas Yojana – in both rural and urban areas, the FM announced further deduction of ₹ 1,50,000 on the payment of loan interest.

With the total deduction rising up to ₹ 3,50,000, the step is expected to invite more people to purchase houses not costing above ₹ 45,00,000. However, there is a slight catch in this. According to some experts, the assessee will not be able to enjoy the complete benefit of the taxing scheme as the total interest payable in a year would not exceed ₹ 3,50,000 bar.

Hence, the affordable home buyer will not be able to claim complete deduction. There are some more terms and conditions attached to it:

  • The sanctioning of the loan should fall within the period of April, 2019 to 31st March, 2020
  • The cost of the house on the stamp duty should not exceed ₹ 45,00,000
  • The property in question should be protected under the affordable housing scheme category
  • There should be no residential property on the name of the buyer at the time of loan sanction

Infrastructural Development

The current budget has put a core focus on building path for India’s high growth by emphasising infrastructural development. According to the field experts, this area has high potential to synchronise the housing demand and supply.

The central government has allocated a budget of ₹ 100 lakh crore for development through infrastructure for a duration of 5 years. It is expected to make India a $5 trillion economy by 2024-25.

Also, the central government has deployed new technology in building affordable homes falling under PMAY scheme.

RBI To Regulate HFCs

According to the new budget, hereon RBI will regulate the Housing Finance Companies, bringing the powers of National Housing Bank (NHB) at rest. This step would ensure a higher uniformity in HFCs and NBFCs regulations. This will also enhance the liquidity support for these sectors.

Failed to Address the Middle-class

The first-time middle-class buyers from Tier-1 and Tier-2 metro cities seems to get no benefit from the budget. The cost of a 1-2 BHK apartment in cities such as Mumbai, Delhi and Bengaluru will be nearabout ₹ 50 lakhs and above. Hence they cannot enjoy the benefits of deductions under affordable housing scheme.

No Space for Industry Status, Liquidity & GST reforms

The real estate sector for long has been demanding the industry status but this also left unanswered in the said budget. This results into difficulty in getting legitimate finances from financial institutions.

Further, the government also failed to address the liquidity crisis that the real estate sector is facing since long. This has resulted in decreased interest of investors towards the real estate and the budget 2019-20 failed to revive their interest again.

Also, the government did not address another major concern, that is, single window clearance for projects. The clearance from various departments take up to 36 months for a project to start, thus delaying the delivery.

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How Fair GST Scored in Real Estate Sector

Vouching to be one of the revolutionary changes post-independence in the indirect taxation system, GST made its voyage to the Indian financial market with the idea to avoid duplication of taxes.

To make India an economy of one nation one tax, the central government also aimed at increasing the tax base to collect indirect taxes. For the real estate sector, the growth under the GST regime is touted to fare 12% annually till 2020.

Also, with the new norms and acts introduced in the Union Budget 2019-20, the real estate market is predicted to witness some structural reforms. The central government has also introduced the affordable housing scheme to achieve its target of delivering houses to all by 2022 for first-time home buyers.

In our economy, concurrent Dual GST is applied on goods and services and it has impacted almost every sector directly or indirectly and real estate is no exception. The latter is already going through a transitional phase with new acts and ruling bodies such as RERA (Real Estate Regulatory Authority 2016), InvITs (Infrastructure
Investment Trusts) and REITs (Real Estate Investment Trusts).

Current Status of Real Sector

In terms of generating employment, the real estate sector is the second largest after agriculture. The experts have anticipated its growth rate to be 30% in the next 10 years with an estimation to touch a bar of US $180 billion by 2020.

To understand the real estate sector, it has been bifurcated into:

  • Housing
  • Retail
  • Hospitality
  • Commercial

Pre-GST Taxes and Charges

Let’s have a look at the previous charges that were applicable in the real estate market for buying and selling a property:

Tax & Charges Bengaluru Mumbai Pune Chennai Gurugram
VAT 4.0% 1.0% 1.0% 2.0% 4.0%
Service Tax 4.5% 4.5% 4.5% 4.5% 4.5%
Stamp Duty 5.7% 5.0% 5.0% 7.0% 6.0%
Registration Charges 1.0% 1.0% 1.0% 1.0% 0.5%
Total taxation 15.2% 11.5% 11.5% 14.5% 15.0%

Source: JM Financial

From the above table, one can easily calculate the taxes to be falling between 11.5% to 15.2%.

Post GST Effects

After the introduction of GST, the residential properties which earlier were varying from 11% to up to 15.5% now attract the GST of 12% with a full input tax credit to sellers. However, the GST has been further reduced to 5% on the projects initiated after April 2019.

Under the composite VAT, the states used to charge lower VAT rates barring any input or partial tax benefit. Herein, the developers, generally, used to pass on the transactional cost to buyers.

However, after GST is being imposed, the transactional cost has increased to 12% where input credit is available for services as well as materials. Point to note here is that in case the developer failed to pass any input credit, it will invite an increase in the transaction cost by 6%.

The property prices could be restricted to 1-2% if the developers pass on the buyers the input credit.

GST Rates on Input Materials for Real Estate

Description of Goods Rate
Steel 18%
Cement 28%
Marble and granite 28%
Sand lime bricks and fly ash bricks 12%
Blocks of marble and granite 12%
Natural sand, pebbles, gravel 5%
Lifts and elevators 28%

Source: BMR
Due to the availability of input tax credit in the purchase of construction materials, the overall tax rate is neutralised.

However, the projects that are at the initial stage will benefit more than the projects at an advanced stage, as maximum input credit can be availed in the former one as compared to the latter.

The dream of affordable housing comes out to be true under the GST regime as the rates are expected to be cheaper if the GST exemption is extended to such projects.

Talking about the luxury segment, they are benefitted very little as the input tax credit limit can be availed up to 12% only. Taxes on other expenditures that occurred in luxury projects are still applicable, hence the overall effect is negligible.

Construction Cost – Reverse Charge Mechanism Impact

Herein, the registered person is liable to pay GST on behalf of an unregistered person under GST from whom the former has taken the goods and services. Such tax has to be paid via cash or bank transaction and cannot be adjusted against the input tax credit.

It has adversely affected the developers as they now have to pay the tax for the services they have rendered from those who fall in non-taxable slabs. The developers are also liable to pay GST for the services they have acquired from local or government authorities, including municipalities et al.

The small investors/developers are more affected by the GST regime as earlier they used to avail services from unregistered suppliers without carrying any liability to pay tax for them.

In the long run, GST is expected to enhance the profit margins and boost the growth in the real estate sector with an easier taxation system than before.