Budget 2022 needs to do away with 5% GST on redevelopment projects

Amit JainUpdated: Friday, January 21, 2022, 08:44 AM IST
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For developers focused on redevelopment projects, the double GST payment has been a major deterrent./Representative image | FPJ

It has been a roller-coaster ride for every industry since the outbreak of the pandemic in 2020 and the real estate sector has been no different with its share of ups and downs over the past two years. The powerful second wave in 2021 brought all the construction-related activities to a grinding halt, resulting in stalled projects and an increase in costs for developers.

While things had begun to look better thereafter, the ongoing third wave in the form of Omicron variant has once again started giving hiccups to the sector, as any decision to impose lockdown could prove detrimental to the sector, which has barely come out of the woods following the bruising pandemic-induced slowdown.

The sector showed great resilience in the past year or so, thanks to strong residential real estate demand on the back of multi-year low interest rates on home loans and concessions from the state governments by reducing the stamp duty rate. However, the realty sector, which accounts for a major share in creation of jobs, has been looking at the government for concessions in the upcoming Union Budget, which, if approved, can provide a major fillip to the sector.

For developers focused on redevelopment projects, the double GST payment has been a major deterrent as it has led to a cost escalation at a time when margins are already under pressure. This holds true in Mumbai and MMR where several local and reputed developers are engaged in the redevelopment of old and dilapidated buildings. The developer pays the GST firstly on cost of construction without input tax credit, and secondly, when the area is delivered to existing residents at market price. Both GST payments are absorbed by a developer, which often becomes a huge cost for them.

Real estate players say they have seen disruption during the Covid-19 pandemic in the last two years with increasing costs, falling revenues and other problems such as labour shortage. Hence, the FM should reverse the decision on GST payment of 5 percent in order to give a fillip to redevelopment projects.

Besides, enhanced tax concessions on income from renting of housing properties and removal of taxation on notional rental income can further boost demand for new properties. To improve access to housing in the low-to-mid income segments, the finance minister should continue its focus on budgetary and extra budgetary allotment to PMAY schemes. The government needs to ramp up budgetary allocation in the forthcoming budget to meet the target of 50 million dwelling units under PMAY.

Several small-to-medium-sized players are facing challenges in terms of reduced cash flows and credit availability owing to the COVID-19 pandemic. The SWAMIH fund, announced in November 2019, had a target to raise Rs 25,000 crore, of which only Rs 10,000 crore has been raised from the government and remaining from large investors, including LIC, HDFC and SBI. Any decision to further augment the budgetary allocation for the SWAMIH fund will support completion of the large stalled real estate projects in the country.

The finance minister should consider taking steps towards streamlining the insolvency process to achieve faster adoption and resolution plans, which will be beneficial to both lenders and homebuyers in stuck projects.

For encouraging salaried employees to invest in residential homes, the finance minister should consider increasing the standard deduction on home loans to Rs 5 lakhs, and should also increase standard deduction from 30 percent to 50 percent. For affordable housing, there has been a demand to increase the limit on value of the house to be raised to Rs 75 lakhs in non-metro cities and Rs 1.50 crore in metro cities from the current ceiling of Rs 45 lakh.

(Amit Jain, Chairman and Managing Director, ARKADE)

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