STIMULUS PACKAGES MUST CONTINUE

Industry andreal estate players feel any withdrawal in stimulus packages coupled with a hike in interest rate will be counterproductive and affect revival of economy, particularly real estate sector. Prabhakar Sinha writes
Real estate sector is at crossroads. On a revival path after it went through tough times owing to economic slowdown in the country, the revival, though, is mainly on account of stimulus packages given by government to the economy. The easy-money policy adopted by the RBI, which led to softening in interest rate, also helped the process of revival in the sector.
However, as the country faces a problem of rising prices, government is weighing the option of withdrawing the stimulus packages. Some economists are also in favour of tightening credit market that will lead to rise in interest rates, which would contain demand and dampen inflationary tendencies.
Industry and real estate players, though, feel any withdrawal in the stimulus packages and hike in interest rate will be counterproductive and will affect revival of economy, particularly real estate sector.
Sachin Sandhir, MD and country head of RICS India, says timing and magnitude of an exit from policy stimulus measures are crucial for sustainability of recovery in property and land markets. With further tightening of monetary policy expected during the course of 2010, policy reforms and measures expected from the budget are crucial to success of realty markets. RICS is a UK-based self-regulatory global professional body, which set up and now regulates qualifications and standards in property market, including construction and associated environment issues in real estate sector. Anshuman Magazine, CMD of global realty consultancy firm CB Richard Ellis, South Asia, says real estate sector is very hopeful that government will continue to provide stability to the industry, which has gone through extreme turmoil this past year. Magazine says government should take measures to improve affordability of end users. To this end, he says government should raise existing slab of Rs 1,50,000 to Rs 3,00,000 against the payment of home loan. This amount is deducted from the assessee's income to compute income tax. He also suggests that real estate sector, including residential township projects, should be granted infrastructure status.
Sandhir, on the other hand, feels that budget should extend tax concessions to residential sector by allowing exemption of income tax on the profit made by developers in constructing small houses of less than 1000 sq ft in Delhi and Mumbai and 1,500 sq ft in other cities. The provision was earlier allowed under Section 80-IB (10), which lapsed on March 31, 2007.
This will be a huge incentive to developers to build affordable houses in the country. In fact, it will help contain prices in real estate sector in the country. Sandhir says housing sector is suffering as a result of global recession and incentives are needed to help stimulate activity and provide the much needed new homes. If government is unwilling to reintroduce a wideranging tax break it could be used in a more targeted way, he says. "A time-bound tax holiday has proved successful in stimulating activity in real estate sector in other countries; for instance, the holiday from Stamp Duty Land Tax in the UK, which expired at the end of 2009. It may also be more effective to target the tax break at specific types of housing. This could be affordable housing units or homes meeting specific environmental standards," he says.
To this end, tax incentives should also be provided to developers undertaking slum and dilapidated housing redevelopment projects. In its report, RICS also pointed out that development of rental property market is essential in addressing housing problems in the country. "This provides an alternative to people who are unwilling or unable to buy a house. Rental property can also help develop a flexible labour force by allowing people to move easily to parts of the country where jobs are available," the report says.
Tax treatment of rental property needs to be considered to help encourage the sector, RICS adds. Taxes should be levied at such a level that a reasonable rate of return may be achieved by those looking to invest in the sector. Under present scenario, house owners are eligible for exemptions of 30% under Section 24 of the I-T act. Taxes are also not levied on house tax levies and interest payments on borrowed capital to buy a house. As a consequence of these outgoings, taxable rental income in most cases is calculated to be very small, and at times a negative portion of the gross rental income. RICS suggest that tax rate of 30% on rental income from residential property be lowered to 20%. Additionally, only 50% of rental income should be taxed as compared to current 70%. A downward revision in TDS rate will ensure that excess tax is not paid and will reduce burden of filing for and processing refund applications. "This will improve the rate of return from rental housing and boost rental market," RICS says.
Experts feel that the budget should pronounce policies that help consolidate the revival of economy and, in particular, the real estate sector as it is the second largest employer in the country, after the agricultural sector. A unit increase in construction expenditure, according to one study, leads to generation of income by five units because of multiplier effect. Due to backward and forward linkages to over 250 ancillary industries, positive effect of growth in real estate sector spreads far and wide and helps the entire economy grow.
Courtesy:- TOI dt:- 13-02-2010
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