Right, the term ‘affordable housing’ is nothing new, but what is new is the activism – the incumbent government’s willingness to make it a reality. It’s amply demonstrated in the last two years – from intents in the form of policy statements/proposals to action on the ground. With a clear focus on affordable housing and homebuyers, the Finance Minister (FM) in the Union Budget 2017-18 proposed to assign infrastructure status to affordable housing projects and facilitate higher investments, in line with the government’s aim of housing for all by 2022.
If 2016 was a year of announcement of legislative reforms, 2017 has been the year of implementation. A slew of measures to promote private sector participation have been taken in the past year such as 100% tax deduction on profits for affordable housing projects, increasing the livable area of the units and relaxed completion timelines amongst others. In the last budget, houses of up to 30 sq. m. and 60 sq. m. in built-up area, in the top four cities and the other cities, respectively, were allowed 100% tax deduction on profits. FM has changed this in this year’s budget to the carpet-area basis, bringing more projects under its ambit. And in order to be eligible, the project which was to be completed within three years of commencement has been extended to five years now.
In the last few months the real estate sector has seen two major reforms come into force – RERA and the GST. Real Estate Regulatory Authority (RERA) that aims to bring in transparency and accountability in the sector and help in completion of stalled projects came into force on o1st of May, 2017 and Goods and Services Tax (GST) aimed at replacing multiple tax structures of Centre and State taxes and resultant cascading effect of taxes came into operation on 01st of July, 2017. While the GST is expected to have far-reaching implications for sectors across the economy, its impact on real estate as a whole is likely to be mixed. Because of this an important yet neglected housing segment like ‘affordable housing’ has now come into limelight.
The complete impact on construction costs is likely to unfold over the coming months. However, aligning with the “Housing for All by 2022” vision of the Modi govt., projects launched under the Pradhan Mantri Awas Yojna (PMAY) have been kept out of the purview of GST. For under-construction properties, the government has allowed one-third of an apartment cost to be deducted towards the transfer of land and GST at the rate of 18% to be paid on the balance amount, which brings the effective GST rate on under-construction properties to 12%. While occupation costs are likely to go up marginally as the 15% Service Tax has been replaced with 18% GST; completed
While occupation costs are likely to go up marginally as the 15% Service Tax has been replaced with 18% GST; completed properties, as well as rented apartments, have been kept out of the purview of the GST. Here one may argue that GST works best in an organised economy, where the supply chain is streamlined and value additions at each step are clear, but the answer may lie in the implementation of GST which could be the first step towards India’s economy becoming more organised. In spite of the short-term disruptions, the benefits of efficient supply chains and lower compliance costs will eventually trickle down in the long-term to benefit the sector.
As on 01 August 2017, out of 29 states and 7 union territories, only 15 states had notified the final rules of RERA while all seven UT’s had notified them though all states were supposed to have notified by July 31, 2017, deadline. Further, there is still ambiguity surrounding the timeline of RERA implementation, as not all the states have finalised their rules. Project launches have slowed down, as developers are facing some teething issues while adjusting to the new regulatory regime and understanding the nuances. And buyers continue to remain in a ‘wait and watch’ mode, as they are likely to opt for RERA compliant projects.
However as per a recent CII report, despite these measures, the segment needs a stronger thrust, in order to be completely viable for private participation. Availability of land, relaxation in development norms, faster approvals for affordable housing projects, better alignment between central and state policies are some of the factors that need to be addressed to allow the segment to achieve its full potential. As these gaps are bridged, then other factors like the use of technology to rationalize construction costs, access to formal sources of capital, wider funding avenues and entry of credible developers will further define the segment decisively by 2020.