RICS demands tax rebates and reforms for affordable housing sector

Royal Institution of Chartered Surveyors (RICS) has said that Finance Ministry in its forthcoming budget should provide the necessary policy incentives and stability, along with adequate tax concessions to promote economic growth and investments in the country.

RICS, which works to elevate the standard of professional performance in the real estate and construction industry,  believes that conducive environment for fiscal consolidation and inclusive growth ca be achieved by cutting expenditures and subsidies. The government should look at continuing stimulus measures, at least in the near future, given the fragile state of economic recovery in the country.

Expressing his views on the forthcoming Union Budget 2013, Sachin Sandhir, MD, RICS- South Asia, has unveiled some of the key recommendations that the RICS believes should be put forth in the Union Budge

• Infrastructure status to affordable/low cost housing - This will provide for funds at lower interest rates as infrastructure falls within the priority sector lending of banks. Also, infrastructure status would mean that developers would be covered under Section 80-IA of the Income-Tax Act allowing them to avail 100% deduction for profits and gains derived from such business for ten consecutive assessment years. RICS suggests that “affordable housing” be brought under the infrastructure definition and affordable housing be treated as ‘public purpose’. This would augment the flow of much needed credit to the affordable housing segment through various sources such as IIFCL, Infrastructure NBFCs, insurance companies (mandated to finance infrastructure), ECBs etc.

• Revise the home loan limit for Priority Sector Lending (PSL) - The home loan limit of Rs. 25 lakhs should be revised upwards to Rs. 35 lakhs under PSL, so as to benefit increased number of home buyers who are currently struggling to buy property due to the price escalations that have taken place in the last few years. Also, bank loans to government agencies involved in the construction of affordable housing units should be relaxed from the existing Rs 5 lakhs to Rs 25 lakh per dwelling unit.

• Tax benefits on housing loans - The deduction for principal repayment of housing loans under Sec 80C should be either increased from the existing limit of Rs.1 lakh or the principal repayments be excluded from section 80C and treated separately. The principal repayments in such a case may be treated as a separate tax exemption component similarly like interest payments on housing loans (under Section 24) which are deducted from the taxable house income and have an upper limit of Rs. 1.5 lakhs. Also, for interest payments on housing loans, the current ceiling of Rs. 1.5 lakhs should be in-sync with the rising interest rates and increased to at least Rs. 2.5 lakhs.

• Income tax rebate for housing development - Under Section 35AD, 100% income tax rebate on capital expenditures for housing developments, where all units constitute affordable housing, is recommended to be extended to the private sector to incentivise development of low cost housing.

•  Interest subvention on housing loans - The interest subvention scheme of 1% on housing loans of up to Rs. 15 lakh where the cost of the property does not exceed Rs. 25 lakh will end on March 31, 2013. RICS recommends, this scheme be extended for FY 2013-14 as well and increased to cover houses costing up to Rs. 50 lakhs in cities such as Delhi and Mumbai where the property values are exorbitantly high.

• Incentives to promote rental housing such as reducing the tax rate by 10-20% from the current prevailing rate of 30%; increasing the limit of deduction on account of interest payment on housing loans from Rs. 1.5 lakh to the fullest extent in case of owner occupied houses; modifying the tenancy laws to protect the interest of the property owners so that owners will be encouraged to freely rent their premises.

• FDI in real estate - Lingering structural and policy related issues with respect to lock-in requirements and exit routes have had a dampening effect on FDI in the sector. RICS believes that certain policy changes will need to be made to improve the flow of funds. It is suggested that (1) the minimum threshold be reduced from 50,000 sq. mts of construction to minimum of 20,000 sq. mts of construction or development of housing plot of 10 hectares; (2) minimum investment limit be reduced from US$5 million to a minimum investment of US$2 million for JV with Indian Partner; (3) minimum lock in period to be 3 years or project completion date, which ever is earlier; and (4) 50% of a project be completed in 5 years.

• External Commercial Borrowing (ECB) for housing - The decision by the RBI to allow entities such as the National Housing Bank (NHB) and Housing Finance Companies (HFCs) to be included as eligible borrowers for financing low cost housing projects is a welcome move. However, RICS suggests that ECB be allowed in all spheres of housing and real estate development, as also in SEZ projects which will help reduce cost of funds and property prices and smoothen out the development of this capital intensive sector. Also, for the development of townships, the permission to use ECB which was up to December 31, 2010 should be extended further to ensure effective development at the lowest prices and thus increase the supply of housing at affordable rates.

•   Award infrastructure status to large-scale integrated townships – ‘Integrated townships’ which meet certain prerequisites such as percentage of land usage, road width, and provision of ancillary facilities etc. of approximately 100 acres in size should be awarded infrastructure status where tax breaks to such projects may be time bound or relevant to only affordable or low carbon housing development. RICS believes, this will motivate genuine real estate companies to come forward and step into promotion and development of large integrated townships to mitigate the huge shortage of housing and stimulate economic development. This will also help the developers get better access to funds like IIFCL and others

Also, developers who build, operate and maintain industrial parks should be awarded a further extension in the tax holiday up to 2015 under Section 80-IA (4) (iii) which will stimulate not only the IT sector but also attract FDI into the realty sector. Such extensions should also be extended to include the logistics and warehousing sectors.