Rationalization of taxes will create a conducive business environment: Nimish Gupta, RICS

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Nimish Gupta, MD South Asia, RICS shares his viewpoints with NewsBarons on topics ranging from the need of affordable housing, REIT roadblocks and Income Tax deductions ahead of the Union Budget 2019.

NB: How will real estate be impacted with budget 2019?

Nimish: The budget is expected to be having all the flavours of an interim budget but remain rational at the same time.

Given the courageous implementation of regulations regimes through the reign of the current government, it is expected that there would not be any dilution of the reformist agenda by the current Government.

A slew of reforms which already has impacted the real estate industry for reasons which have been discussed in detail in the past three years, are expected to now bring cheer to the industry since Industry has adopted them and amended their own business practices accordingly.

The fact that despite the FDI in country growing in the past four years, the FDI in Real Estate and Construction sector has seen degrowth, is expected to be taken up seriously so that this business anomaly can be corrected.

Continued focus on Housing for all, driven by shortfalls in the targets in the run-up to 2022, is expected to drive further incentivization in the newer technologies to be brought in for expediting implementation of the vision.

NB: What are your expectations from Budget 2019?

Nimish: Ahead of the Union Budget 2019-20, RICS is looking forward to a rational budget to provide adequate stimulus to key sectors in order to promote rental and low cost / affordable housing mechanisms, infrastructure financing and development. At a macro level, RICS is expecting the Ministry of Finance to provide necessary incentives and stability, along with adequate tax concessions to promote economic growth and investments in the country.

Regulation is of critical importance in shaping the welfare of economies and society. Given the interlinkage of real estate markets across the globe, the objective of any regulatory policy (RERA, single window clearance, REITs etc. in India) is to ensure that regulation works effectively and to the benefit of all stakeholders. From India’s perspective, it is also essential that all changes taking place in the regulatory environment support and promote the Government’s mandate of developing smart cities and delivering on the promise of housing for all.

Affordable Housing is the need of the hour. In addition to tax sops, the Government should also look at mechanisms to increase supply of land for development of affordable housing through process of reverse tendering. In further keeping with the ‘housing’ issue, while the Rent Control Act, a major factor throttling the rental market has been abolished for many years in several parts of the world, Indian states have been slow to act on this reform. Low yields on rental housing have continued to remain a bottleneck for promoting a healthy rental market. Therefore, lowering the tax rate on rental income along with taxing a much lower percentage of the rental income would help incentivize rental housing. These steps are also likely to uplift consumer sentiment.

Additionally, a simple and efficient building approval process is essential in aiding the provision of appropriate property; especially in a country like ours where there continues to exist a huge housing shortfall which requires supply to improve and also as infrastructural facilities continue to be strengthened. With RERA in place, there are still hurdles that exist in seeking approvals. It is imperative that we realize that a shift from an excessively detailed and binding approval process to a single window mechanism – one that encourages the creation and diffusion of new knowledge based on sharing best practices and technology is essential for the on-going success of the real estate and construction sector.

RICS, given its expertise in land, property and construction to develop a sector specific skills development plan for developing skills, competencies, knowledge and qualifications; standardization of processes, planning and execution of training of trainers and promotion of centers of excellence, would welcome a discussion with the Government to ensure the development of professional training centers and courses targeted at mid-to-top level management professionals. This would ensure that the property sector benefits from up-skilling and professional development programs, specialized knowledge and latest techniques and best practices.

NB: What are the important measures required to boost real estate?

Nimish: We should look at a Six Point agenda by the Government which will provide necessary boost to the sector:

1. Increasing FDI in the sector and participation by Multinational giants in Real Estate and Construction both

2. Further incentivization to boost growth under PMAY

3. Carry out review of current RERA Act to bring a nationwide consistency and standards with a view to provide a professional and effective ecosystem

4. Continued focus on infrastructure led development but include elements of value engineering & Life cycle costing to help sustainability and enhance value of the projects

5. Identify and encourage newer construction technologies with incentives to industry for adopting such technologies

6. Make States implement Commercial Courts faster for improved contract enforcement helping India improve its overall rank not only in this area but helping our pursuit to be in the Top 50 nations in ease of doing business.

NB: What is your assessment of initiatives like tax rebates, GST, re-financing from NBFCs and update on PMAY?

Nimish: Given that this is an interim budget, the industry must have a rational approach towards its expectations. Rationalization of taxes is something that the industry is looking forward to as it will create a conducive business environment. Currently, GST on under construction properties is pegged at 12% of sale value. It is our view that this be in the range of 6% percent in line with the composite scheme proposed for services. The government should also consider bringing stamp duty under the ambit of GST, in order to reduce the tax burden on home buyers while ensuring that the benefit of input tax credit is passed on to them.

The move by the RBI to relax liquidity norms to ease the strain in the financial markets and allowing more bank lending to non-banking finance companies (NBFCs), which were facing asset-liability mismatches was welcome, albeit that limited NBFCs would benefit. This would aide affordable housing finance to some extent and provide a boost to the sector.

With respect to the PMAY, while a lot of investment has been pumped into the scheme, it is now time for on-ground activity to kick off in full swing and show results.

NB: What are the factors impacting the implementation of REITs in India?

Nimish: For long Indian Real Estate has grappled with two major challenges – liquidity and inadequate asset management. REITs have the ability to address both these aspects. If implemented with the right incentives, they can add significantly to the volume of high-quality commercial and office space entering the market and ensure assets are managed appropriately.

REITs have made their way into India at an opportune time, when the potential of the commercial property sector is clearly visible. What’s even more heartening is the focus and intent of SEBI to ensure REITs get implemented. With the removal of DDT, one major roadblock in the way to list a successful REIT in India seems to have been overcome.

However, there are other hindrances that exist. The levy of stamp duty charges at the state level is an impediment to REITs, as it can reduce returns and make this form of investment less attractive, compared to bonds and other asset classes. Aspects of exchange control laws also act as hindrances. Another major roadblock is with respect to ‘Valuation of assets’ which requires great attention.

In a maturing market like India where new investment tools such as REITs are being introduced, it is imperative that accurate financial reports are prepared based on accurate asset valuations, which in turn rely on standard property measurement principles. Adoption and acceptance of globally consistent standards such as IPMS (International Property Measurement Standards), will only facilitate cross-border transactions and contribute to the viability of the Indian property market by promoting transparency in financial reporting, as well as reliability of valuations performed – aspects that are increasingly attracting investors to property markets worldwide.

NB: What are your suggestions for repayment rebate on house loan, 80-IBA, 80C?

Nimish: The government should increase the income tax deduction limit for individuals on interest payment against loans taken for acquisition or construction of self-occupied property. This will help increase the demand for housing.

The current limits under Section 80 C, which were last revised in 2014-15 needs a handsome revision. We are hopeful that the Government will reconsider this limit and raise the same significantly.

The government has introduced a number of reforms to improve the supply of affordable housing. This can further be augmented by relaxing the eligibility criteria. Existing provisions under section 80-IBA permit a 100% deduction with respect to the profits derived from affordable housing projects, subject to specified conditions including a maximum unit size of thirty square meters in metro cities and sixty square meters elsewhere. An increase in the qualification carpet area to up to 100 square meters would definitely be beneficial and encompass a larger spectrum of projects.