Abolish Capital Gains Tax On Residential Real Estate
A recent report
states that residential real estate prices have dropped 2%-9% across India
because of the prolonged lockdown.
Other articles from
journalists who cover the space have speculated about an expected 20%-30% drop in
residential real estate prices. All as a consequence of the economy in crisis.
However, inelastic urban
and metro land prices and inflation alone would dictate against this. It is an
oft ignored fact that real estate prices, all categories, at a minimum, tend to
keep up with the most of inflation. A person is assured, even in a bad market
in India, that his flat or house will appreciate 10% per annum pro rata over a
period of ten years. How many can say that any more about highly volatile
Indian equity in a ruined economy?
This low pricing
now for residential real estate is on top of price stagnation over the last few
years due to apparently massive over-supply and the absence of speculators and
investors.
Though it is
remarked quite often that demonetisation and the advent of GST contributed
quite a bit to the decline of enthusiasm for residential real estate.
Nevertheless, Builders are said to have an estimated Rs. 3.7 trillion in unsold
inventory, according to international real estate brokerage JLL.
The end-users too
are either waiting for further drops in pricing from a beleaguered real estate
industry, or a better atmosphere of economic certainty and the prospect of
sustained job security and cash flows. This, of course, might be a year or two
in the coming. Most companies, both in the organised and unorganised sector,
will need this sort of time to recover to full strength.
While real estate
is composed of residential dwellings, commercial office and retail space,
hospitality in terms of hotels and resorts, and land; it is the residential
segment that is stagnating the most.
With recent
government initiatives such as REIT, a government stimulus of Rs. 25,000 crores
for stalled residential projects, the ingress of private equity and venture
funds from abroad investing, money has flowed in, but mostly into commercial
and retail development.
Land is
increasingly being organised on the basis of a collaboration between developers
and land owners, given its very high cost. This works well for the economics of
ventures that would otherwise flounder on this very first requirement.
Together, and not
counting the government’s hyper infrastructure building and modernisation
drive, this real estate sector has
projected some very encouraging numbers running into hundreds of
billions of dollars in every reported instance.
For example, the real estate sector, housing,
hospitality, offices including SEZs,retail, has the potential to reach a market
size of US$1 trillion by 2030. This is up from a modest US $120 billion in
2017. It potentially can contribute, though statistics can be misleading in a
deeply depressed economy, 13% to 17% of the economy.
The real estate
sector can quickly ramp up, once again, and contribute the second largest
number of jobs to the economy too.
When these are
spread out around the country, not just in the six metro cities, but another 24
smaller ones, and some 200 sizeable towns, it makes for something of a panacea,
particularly for the artisanal class and unskilled labour. Not to mention the
professional classes and the large number of industries that supply to
construction.
That farming absorbs
the largest number of people in rural India is not surprising, given the mostly
manual, over-manned rural landscape. But does it really pay? If it did, you wouldn’t
have lakhs of migrant labourers. A large number of these migrant labourers work
in real estate and in those companies that supply goods and services to real
estate.
Given the very
difficult current situation, the ruling NDA needs urgent remedy, shorn of some
of its more squeamish feelings about the cash economy. It should think only of
such measures that will yield quick results in the first instance. One of them
is certainly to revive demand in the residential real estate sector.
A first task should
be to absorb the unsold houses, and free the capital stuck. It belongs to
hapless would be home owners who have paid instalments, the over-extended Builders,
NBFCs, investors and Banks that have lent them the money.
For primary buyers,
the stamp duty should be capped at a uniform 2% of the circle rate countrywide,
making it easier and cheaper to take over and register properties. None of this
should be much of a revenue loss for the government that has quietly added both
GST and VAT to the purchase price in any case.
This has inflated
purchase cost by 10% to 20% for the buyer, without recourse, and after he has
booked the flat when these taxes were not applicable. His calculations on both
price and delivery have gone badly awry. This has resulted in extended rent payments
in many cases, and housing loan EMIs against a flat that should have been
delivered in three years, but is stuck sometimes for 7 to 10 years instead.
An abolition of Capital
Gains Tax altogether on residential real estate transactions for a period of
ten years will galvanise the secondary market in residential houses. This will likely
wipe out the unsold inventory, with investors and speculators flocking to the
business opportunity. And it is these investors and speculators that can buy
and sell large numbers of flats for the arbitrage, even in the near absence of
end-users reluctant to make expensive commitments at this time. It is this
speculation, philosophically repugnant as it may be to the current government,
that has been the life blood of the real estate industry throughout the
comparatively buoyant UPA years.
People in general
should be encouraged to purchase houses for their own use of course. But having said that,
there should be no tax consequence as to
number of flats purchased and sold as stock-in-trade apart from the normal
corporate or individual direct taxes applicable. There is nothing wrong in the
citizen regarding real estate as a solid business opportunity even if it does
not want to live in the house or flat it is buying.
Residential and
Office rentals as a category of income should also be rendered tax free for a
period of ten years. This will encourage the animal spirits that have been
dampened to the point of extinction at present.
The time has come
to look upon the real estate sector, along with infrastructure, as an economic
catalyst, massive job creator, growth multiplier. It can be a saviour in tough
times.
For: SIRFNEWS
(1,087 words)
May 8th, 2020
Gautam Mukherjee
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