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For the real estate sector, 2016 will be remembered as the year of dramatic policy changes. These changes have the potential to usher in a more organised, cleaner and more transparent real estate market in India, although some of these policies may also adversely affect the sector in the short to medium term.
The top 10 policy changes in 2016 that affect Indian real estate are:
- Real Estate (Regulation and Development) Act, 2016.
- Amendment to the Benami Transactions Act.
- 100% deduction in profits for the construction of affordable houses.
- Interest subsidy for first-time home buyers.
- Change in arbitration norms for construction companies.
- Exemption of service tax for affordable housing construction.
- DDT exemption for SPVs to REITs.
- Implementation of the Goods and Services Tax structure.
- Demonetisation of 500 and 1,000 rupee currency notes.
- Status of permanent residency, for foreign investors.
Regulations aimed at boosting transparency in real estate
A report by Colliers International, maintains that the real estate industry was in the news for all the right reasons in the year 2016, with the government announcing several policy initiatives. It says that the Real Estate (Regulation and Development) Act, 2016, which came into force in March 2016, has laid down a regulatory framework that will change the way real estate sector operates in India. “It aims to enhance transparency, bring greater accountability, set disclosure norms to protect the interest of all stakeholders and also ensure speedy settlement of property disputes,” says the Colliers report.
Similarly, the Benami Transactions (Prohibition) Amendment Act, 2016, lays down stringent rules and penalties associated with benami transactions. It establishes a regulatory mechanism to deal with disputes arising from such transactions and levying penalties, to increase the participation of institutional investors, regulate the business and make India an attractive investment destination, adds the report.
The Real Estate Act has already been put in force in Uttar Pradesh and Gujarat, while other states will have to formulate the rules under the act and implement the same by mid-2017, points out Kishor Pate, CMD of Amit Enterprises Housing. “The amendments to the Benami Transactions Act, may curtail the influx of unaccounted funds into real estate. In June 2016, the Model Shops and Establishment Bill was announced. This bill allows all retail establishments, like shops, malls, cinema halls, restaurants, etc., to operate 24×7. Although it was welcomed by the retail sector, we have seen varying actual response, in terms of retailers keeping their operations open,” says Pate.
Policies that will boost affordable housing
Real estate developers maintain that the policy changes during 2016, will help the sector more than harming business. Some developers even insist that the policy changes have been favourable for developers, as well as home-buyers.
Nikhil Hawelia, managing director of the Hawelia Group, says that the government’s proposal for 100% deduction in profits for housing projects, with flats up to 30 sq meters (in the four metro cities) and 60 sq meters (in other cities), which are approved during June 2016 to March 2019, will promote affordable housing. The condition that the project should be completed within three years of grant of approval, goes in favour of the buyers, he adds. Pointing to another policy in favour of buyers, Hawelia says, “The union budget for 2016-17 also proposed an additional deduction of interest of Rs 50,000 per annum for first-time home-buyers, for loans up to Rs 35 lakhs, sanctioned during the next financial year, for houses not exceeding Rs 50 lakhs.”
The exemption of service tax on the construction of affordable houses up to 60 sq meters under any central or state government scheme, including PPP schemes, is also intended to boost the affordable housing segment and encourage greater collaboration between the public and private sector in its construction.
Impact of GST and demonetisation on property markets remains uncertain
While most of these policy decisions have been welcomed by the real estate fraternity, the impact of two major policies remains to be seen – the Goods and Services Tax (GST) and the demonetisation of high-value currency. For the GST, clarity is still lacking on whether real estate will fall in the ‘sin’ or ‘common use’ category and the tax rate that it will attract – whether it will be 18%, or even higher.
Clarity is also needed on whether the GST will subsume the existing taxes that are levied on under-construction projects, such as service tax and value added tax (VAT).
Pate says that the demonetisation announcement and the withdrawal of Rs 500 and Rs 1,000 notes, has hit land deals across India, while residential sales in the resale market have also reduced markedly. Consequently, prices are reducing in these segments. In the primary market, reputed developers who conduct transparent dealings via official channels, have been less affected, he adds.
In a cash-driven economy like India, demonetisation may cause home buyers to adopt a ‘wait and watch’ approach in the year ahead. This may not be good news for the real estate sector, which is struggling to emerge from a slowdown.
(The writer is CEO, Track2Realty)