Tax waiver on affordable flats is a double edged sword as many builders might exploit the rule !!!

In a very good and positive step the government has announceda  100% tax waiver in the Union Budget on 'small flats' to encourage affordable housing. It is an incredible step to boost affordable housing but will it really work ? Or will it backfire ? The new budget has offered a 100% tax sop for property developers constructing who build up to 322 sqft in the four major metro cities (including Mumbai) and up to 645 sq ft.

So the scenario looks like this: In the name of affordable housing, a real estate developer can build a small 310 sqft apartment in Breach Candy, a plush locale in the South of Mumbai and sell it at almost 90,000 Rupees per square feet. Almost a 3 Cr deal and the builder under the new affordable housing rule will have to pay zero tax. It is sure many real estate developers have already made a note of this loophole.

As there is no definition about how much such an affordable house should cost, there would be many players who would like to this joy ride and save crores of rupees in tax.

It is very difficult to clearly define the guide lines as there are various permutations and combinations possible in this segment due to the highly variable nature of the sector. The person for whom it has to be affordable and his income bracket become most important indicators of his affordability.

In the past there have been different occasions where the government along with tax benefits has also allowed preferential use of land citing the affordability factor. The results have not been too encouraging and there are smarter people in the market who have gone on to buy multiple apartments in the name of different family members and after the dust settles down , the multiple units are combined together to make a single apartment.

The biggest fear and threat to these good intentions remain that these tax benefits permits dubious real estate developers to construct small “affordable” apartments and smartly sell combinations of such flats in plush and expensive areas like Peddar road, Malabar hill. They will be making huge profits and paying zero tax and all the time they would still be on the right side of the law.

The new affordable housing law does not stop property and real estate developers from selling these affordable and tiny apartments at any cost since there is no price cap defined. The rule, however states that multiple flats cannot be sold in such projects to one family. No second residential unit can be allotted in the entire project to a spouse or even a minor child. The difficulty and challenge still lurks in the fact that there are property developers who will take advantage of the law, ben it and flaunt it to suit their cause and in the process dilute the entire purpose of affordable housing segment itself.

The government has broadly classified an affordable home as the following:  If the housing accommodation is available to a purchaser at a cost that works out to be his income for five years combined, then the house is deemed to be affordable. This definition means that only a very negligible amount of our huge population can afford the housing options that are present in the real estate segment currently.

The affordable housing segment and the whole mission of providing homes to each and every one in the country will have to have all the elements of practicality and adaptability married together so that the formula that emerges is a win-win for everyone and there are no major loop holes. Only the right intentions will not suffice, there will have be some serious technical thinking backed up with stringent applications on the actual ground level.