Harpreet Singh and Naveen Gupta
By 2030, the Indian real estate (RE) market is likely to be worth $1 trillion and will contribute 13 percent of the country’s GDP by 2025, according to NITI Aayog. The sector will be driven by rapid urbanisation as Indian cities grow over the decade. However, the surge in global commodity prices has increased the cost of construction substantially. A rise in the cost of living and interest rates on home loans has further reduced affordability. The policymakers can fuel the growth of the RE sector and relieve the stress on the pockets of homebuyers by providing certain taxation reliefs, some of which have been discussed here.
Personal tax relief measures
The deduction of interest on housing loans may be increased from Rs 2 lakh to Rs 4 lakh, in sync with the market realities considering the ticket size of loans vis-à-vis property cost and the rising interest rates on home loans due to gradual tightening of monetary policy by the RBI. With regard to the repayment of the principal portion, the existing deduction, capped at Rs 1.5 lakh and comprising multiple investments (Provident Fund, Term Deposits etc.), needs to be significantly increased.
Alternatively, a separate deduction of Rs 1.5 lakh to Rs 2 lakh exclusively for housing loan repayment may be introduced. These measures would provide much-needed relief to homebuyers, already saddled with inflated EMIs, by reducing their overall tax liability and leaving excess cash in their hands. Further, these measures will also lead to deeper housing penetration by inducing home-buying, which will also result in the growth of the RE sector.
Presently, gain on property held for more than 2 years prior to the date of sale is considered long-term and is taxable at the rate of 20 percent. However, in the case of the sale of listed shares, the prescribed holding period for long-term capital gain is 1 year and the applicable tax rate is 10 percent. The government may consider providing relief to sellers by bringing taxability of gain on the sale of property at par with that of listed shares.
Similarly, capital gain on the sale of property of up to Rs 2 crore invested in buying two properties is exempt from taxation. However, in case the capital gain exceeds Rs 2 crore, the investment must be made in only one property to claim exemption. In light of the increasing property rates, especially in Tier 1 and 2 cities, these limits of Rs 2 crore and 2 properties may be relaxed and exemption be available for investment in 3 properties, irrespective of the amount of capital gains. In addition to providing relief to sellers, this measure will also lead to the development of the secondary market, an important constituent of the RE sector.
The time-limit to issue credit notes should be linked with cancellations of units instead of the original invoice date. Presently, in most cases, credit note cannot be issued in case of cancellation of units due to a lapse of time-limit and the developers refuse to apply for refund as claiming refund from the department is always a hectic task, which results in increased cost in the hands of the customer.
The threshold of Rs 7,500 on exemption of maintenance services provided by RWA should be increased especially in the case of high-rise buildings. High-rise buildings enhance floor area for residence purpose given the paucity of land and it lowers construction cost per unit. However, the same faces setbacks due to increased recurring maintenance costs and additional GST liability.
Further, a reduction of the GST rate on brokerage services (present rate 18 percent), at least in the context of residential properties, may be contemplated.
An option can be provided to the taxpayers to pay tax on construction services with an input tax credit (ITC) instead of the present mandatory lower rate without ITC.
In addition, absolute exemption on development rights can be considered by replacing the present version of exemption which comes with certain conditions causing disputes over valuation, time of supply and other issues. In any case, one-third land abatement on the valuation of development rights should be allowed akin to abatement provided in case of construction services provided by the developer to the landowner under an area-sharing arrangement.
Refund of unutilised ITC pertaining to inputs given for inverted duty structure (IDS) should be allowed in case of construction services as well. The present restriction of disallowing refund under IDS for construction services is discriminatory.
The RE sector has a multiplier effect on the development of the economy and the ecosystem of the country. Thus, it is crucial to address the tax issues challenging this sector to achieve sustainable urbanisation and affordable housing for all.
Harpreet Singh is Partner, Indirect Tax and Naveen Gupta is Partner, International Tax & Regulatory at KPMG in India.
