What Will Budget 2022 Usher in For The Indian Real Estate Sector?

It is definitely not a secret that the real estate industry in India has gone through a lot of stress in the recent past and is still in the midst of a recovery. It does require all the support that it can and this budget could be a turning point.

The Indian economy has faced many waves of the epidemic during the past two years, causing the country's growth rate to stall and even decelerate. The real estate industry has not been immune to these shocks, and in fact, during the first Covid-19 wave, the sector saw a major fall, particularly in the residential segment.

Although there has been some improvement in the residential segment over the previous few quarters, the recent resurgence of the pandemic has begun to cast a shadow over the sector's recovery, with commercial offices and retail facing major uncertainty.

An incentive from Budget 2022-23, given the importance of real estate's contribution to GDP, job possibilities, and support to other ancillary industries, can go a long way toward recovering long-term sustainable growth in the industry.

A few of the direct tax reduction initiatives that the Indian real estate sector would want to see implemented in the approaching budget 2022 include the following:

Removing the restriction of Rs 2 lakh or raising the ceiling to at least Rs 5 lakh in the case of taxpayers who have purchased or developed residential property for self-occupation, and allowing them to deduct interest on loans. This will assist to increase their liquidity while also incentivizing them to make real estate investments.

The restriction on the amount that can be set off against income arising under any other head of income to Rs 2 lakh has proven to be detrimental to the real estate sector, which is engaged in the construction and leasing of properties, and where significant house property loss is generated in the initial years.

The abolition of this restriction (particularly for commercial properties) may aid in the increase of investment in the sector.

Tax exemptions for affordable housing projects are available until March 31, 2023, and cover projects that have been approved up to that date. The time frame for completion of such projects should be extended from the present five years to seven years, and the Rs 45 lakh cap on the value of the house should be lifted in order to encourage investment in the segment at the same time.

It is proposed that real estate developers be granted a 10-year tax break on profits gained through rental housing, or that revenue from the rental of housing properties be taxed at a fixed rate of ten percent in order to help the government achieve its "housing for all" target.

The deduction from rental income under Section 24 (a) of the Internal Revenue Code should be increased from 30 percent to 50 percent in order to improve the effective returns from rental housing.

For the economy, the introduction of the idea of real estate investment trusts (REITs) and the related favourable tax system, which were intended to promote investment in the real estate segment, has proven to be a positive development.

For the purpose of increasing the competitiveness of such investment products, the holding duration for units of business trusts for long-term capital gains tax treatment should be brought into line with the holding period for listed shares – that is to say, a 12-month holding period.

It would be beneficial to extend the tax exemption available to sponsors on the transfer of shares in a special purpose vehicle (SPV) to the transfer of capital assets/interest in a limited liability partnership (LLP) or firm, as well as other securities, such as debentures, and to rationalise tax withholding provisions.

The repeal of a provision that allows for the taxation of notional rent if inventory remains unsold or vacant for two years after the end of the financial year in which the certificate of completion of construction of the property was granted will assist in providing relief to developers who have inventory on hand.

According to the current system, the tax consequences of converting a stock-in trade asset into a capital asset are realised at the time of conversion, resulting in an immediate cash outflow without any actual sale of the asset or the availability of significant cashflows from the asset.

Accordingly, the regulations controlling such taxability should be revised to postpone the triggering of tax outflow until the actual sale of the asset, in a manner similar to the tax provision specified in the event of the conversion of capital assets into stock-in-trade stock.

The question of whether or not capital gains originating in the hands of taxpayers who are corporations or partnership businesses executing joint development agreements should be taxed has been a source of controversy. However, only individuals and HUFs were eligible to use Section 45 (5A) of the Income Tax Act, 1961 since there was some uncertainty in the previous provision of that act. A broadening of the application of this clause to include all taxpayers, rather than only individuals and small and medium-sized enterprises (SME), will bring the continuing dispute on this issue to a close.

In order to maintain the fragile recovery of Indian real estate that has been observed in recent months and to overcome the uncertainty created by the new pandemic wave, the introduction of the above steps by the Indian government is anxiously expected by the entire real estate fraternity in India with great anticipation.