REVIVE HOUSING SECTOR, BOOST ECONOMY

Real estate plays an important role in the revival of the economy of a country. Naredco, in its pre-budget memorandum to the Union government, has asked for a number of measures to revive the sector, which has been languishing since 2008. PRABHAKAR SINHA writes

 

The construction and furnishing of a house involves nearly 250 sectors of the economy. Therefore, revival of the real estate sector helps in reviving the whole economy, including banking.
    At present, the contribution of this sector to the GDP is around 5-6%. But it is likely to grow to 15-20% in the next 15-20 years, if 25% growth in the sector is maintained.
    It has been established through a study by IIM, Ahmedabad, that a unit increase in the final expenditure in the housing sector is capable of generating five times additional income, and for every one rupee spent, 78 paise go to the GDP.
    Government revenue collection, according to a report by National Real Estate Development Council (Naredco), would grow as 40-50% of the housing cost is ploughed back to the government treasury through VAT, taxes and duties paid
by developers and homebuyers. This also leads to increase in capital formation.
    Cement, steel and around 250 ancillary industries, associated with housing also grow. This will also lead to doubling of employment in the sector from 10 to 20 million, in the next 10 years, if the sector grows by around 25% per annum.
    Another study by IIM, Ahmedabad, shows that 10% increase in final expenditure is capable of increasing total employment by 2.5%.
    Naredco, in its pre-budget memorandum to the ministry of housing and urban poverty alleviation, government of India, has asked for a number of measures to revive the sector, which is languishing since 2008 — the year the global economy was hit by the turmoil in banking sector.
    Besides asking for tax break, the council also demanded a change in the definition of the infrastructure facility, so that integral townships and grouphousing societies may be benefited.
    The council demanded that deduction of interest on home loans from taxable income of homebuyers should be increased from the present level of Rs 1.50 lakh to Rs 3 lakh.
    The memorandum explained that the Finance Act 2001 limited the deduction of interest on home loan taken to acquire, construct, repair, renew or reconstruct houses, in the case of owner-occupied houses, to Rs 1.50 lakh. Before April 1, 2002, deduction used to be entire interest payable.
    Indexed cost of Rs. 1.50 lakh interest relief in 2002, as per Cost Inflation Index (CII) notified by the central government, will be Rs 2.64 lakh (1.75 times) in 2011-2012. At the same time, indexed cost of a property costing Rs 20 lakh in 2002-2003 will be Rs 35.12 lakh (1.75 times) in 2011-2012.
    In view of the above, the council argued that there is a clear case for increasing the deduction limit of home loan
interest from Rs 1.5 lakh to Rs 2.75 lakh, at least. With priority sector lending raised to Rs 25 lakh, it is recommended that deduction of interest on home loans under Section 24 of IT Act 1961 be increased to Rs 3 lakh.
    Naredco has also suggested that the deduction on account of interest payment available under Section 24 should be made applicable from the year in which capital was borrowed. Also, three years period for acquisition or completion from the year of borrowing should be dispensed with. This will provide impetus to the housing sector, which is reeling under huge housing shortage, the council said.
    Section 80C allows a deduction of up to Rs 1 lakh from the annual income on consolidated payments or deposits specified in sub-section (2), which includes payments on purchase or construction of a residential house property through instalment or part payments or repayment of amount borrowed from government or banks, and stamp duty, registration fee and other expenses for the purpose of transfer.
    As sub-section (2) caters for payments on account of numerous essential savings such as pension, provident fund, insurance, etc, there is none or very little scope left under this section to accommodate payments of principal amount borrowed for purchase or construction of a residential house. Therefore, Naredco suggests that the ceiling of Rs 1 lakh under section 80C be increased to Rs 2 lakh and Rs 1 lakh out of it be exclusively reserved for payment of principal borrowed for the purchase of a residential house. This will help in boosting housing stock, the council says.
    At present, capital gain arising from transfer of any capital asset including a house is exempt from tax in cases where the sale proceeds are invested in acquiring one residential house. Such a restriction, Naredco said, is a deterrent to the object of boosting the housing sector, and needs to be removed. Thus, the memorandum demands the restriction be removed and the scope broadened by allowing the exemption, as long as the entire capital gain is invested, in one or more houses.
    Naredco argues that in view of the housing shortage in the country and the avowed objective of the government, ‘Shelter for All’, and in view of the fact that not all can afford ownership housing, we need to give a big boost to ‘rental housing’. In order to boost the housing sector so that housing for the purpose of renting out is available, Naredco suggested a number of measures:
    a) It proposes that income from renting of housing properties be taxed at a flat rate of 10%.
    b) Provision of rental housing on a large scale will require the services of property management firms. In order to make property management a viable activity, income of firms which are wholly engaged in maintenance or repair and other specified management services for rental housing blocks may be brought within the ambit of Section 80 IB (10) and Section 10 (23G).
    c) High cost of houses and high property taxes lead to a low rate of return (ROR) from rental housing making renting out an un-remunerative proposition. To improve the effective ROR from renting, it is suggested that the deduction from rental income under Section 24(a) be increased from 30% to 50%. This will promote rental housing. For women, the Pre-Budget Memorandum 2012-2013 suggests the deduction could be 100%,keeping social requirements and empowerment of women in view.
    Naredco wants a deduction in tax on rental income and wants it to be reduced to 7.5% in case of individuals and HUFs and 10% in other cases. This will also reduce the workload of the income tax department in processing the refund applications.
    Further it has suggested that deduction of 40% of profit derived from business of providing long-term housing finance, as applicable before 2007 Budget, should be reintroduced. This will improve the thin margins of HFCs and increase their lendable resources. It has suggested that the provision of Section 36 (i) vii a should be extended to housing finance companies like it has been done for banks, and all the bad debts should be considered for deduction on provisions made and interest derecognised as per the regulators’ directions. These measures will go a long way in sustaining growth in the housing sector.