Budget 2022 Expectations: Knight Frank India suggests Input Tax Credit reduction for developers, 100% tax exemption to retail and hospitality businesses

The real estate sector is among the large contributors to the country’s GDP and the second-largest employer in the country. The sector drives over 200 industries right from manufacturing to services and any incentive extended to real estate can also stimulate all the ancillary industries. This sector was adversely impacted by the onslaught of the pandemic. Improved sense of homeownership and some state government incentives have rekindled demand. However, the prolonged pandemic implies that the sector will require support to chart a sustained recovery.

With this backdrop, Knight Frank India suggests measures that can serve the cause of stimulating the real estate sector and revive the nation’s economic growth, while maintaining a fine balance on its finances.

1) Allow Input Tax Credit (ITC) to reduce the tax burden on developers

Mounting construction cost restricts residential price flexibility and keep demand comparatively suppressed.

Currently, there is a GST of 5% on under-construction residential units and 1% on affordable housing, but without ITC. No GST is charged on completed units. The GST on cement and steel is 28% and 18% respectively and the tax outgo has spiked along with the rise in these commodity prices. As the developers cannot claim tax credits for GST paid on input items, this amount gets added to the construction cost and leads to higher apartment prices for homebuyers. Further, it also negates the purpose of GST which was to remove cascading impact of taxes. If ITC were allowed, the tax savings will be substantial and allow developers the room to lower prices.  The Government can use this budget session to assuage this concern and assure for restoration of ITC in the upcoming GST council meet. The government should also look at reducing the GST rate on cement to give a boost to construction activity in the economy.

2) 100% Income Tax exemption should be provided 

Retail and Hospitality businesses were severely impacted by the pandemic. Therefore, losses (Audited) incurred during FY 2021 and FY 2022 by Retail and Hospitality businesses should be allowed to be carried forward till FY 2024 to set off against profits during this future timeline. Alternatively, 100% Income Tax exemption should be provided for the same period.

The retail and hospitality sectors have been the worst impacted due to lockdowns as travel restrictions and social distancing norms were necessitated by the pandemic. Intermittent opportunities to resume business during the past year only hurt their finances more as they had to commit significant investments to make their establishments ready, only to be shut down again as pandemic fears resurfaced. These businesses provide huge employment opportunities and have great potential if they are supported during this very turbulent time, hence tax breaks are recommended for the specified period.

3) Section 80IBA registration timeline extension by 12 months

The affordable housing project registration deadline to avail tax holiday under Section 80IBA has lapsed.

The 100% tax holiday for affordable housing projects under Section 80IBA is available for projects which are approved till March 31, 2022. This section allows developers to claim 100% tax exemption on profits subject to several qualification criteria including the approval deadline. COVID-19 has delayed the registrations process and projects that would otherwise have registered on time, might not be able to make the registration deadline. Since this is arguably the most materially meaningful measure to boost the viability of affordable housing projects, this is important to extend the project approval deadline.

4 (a) Focused tax deduction on principal repayment of housing loans (Section 80C)

Affordability is the biggest catalyst to homebuyer demand. Currently, Section 80C of the Income Tax Act does not provide for a focused benefit on housing which is the largest and most important expense item for most taxpayers during their lifetimes. Taxpayers have numerous investment alternatives to choose from and the lack of exclusive tax benefit on the principal amount of home loans makes consumers indifferent towards a house purchase. A separate annual deduction of Rs 150,000 for principal repayment will improve housing affordability and provide the much-needed fillip to opt for home loans.

(b) Hiking home loan deduction limit under Section 24

Section 24 currently allows for a deduction of Rs 2 lakh on housing loan interest. This needs to be extended to Rs 5 lakh to boost affordability and housing sales.

(c) Establish city-wise ticket size criteria for affordable housing to factor in local market realities

Currently, an affordable housing unit cannot exceed a carpet area of 90 sq m in non-metropolitan cities and towns, and 60 sq m in major cities. In both cases, the cost of the unit cannot exceed Rs 45 lakh. While these criteria are appropriate for cities where there is sufficient housing inventory available within these areas and cost limits, they leave homebuyers in the more expensive cities such as Mumbai with very few options. Developers are also forced to increasingly reduce individual unit sizes to qualify under these criteria and similarly, buyers also have to submit to this status quo despite the obvious inadequacies that this small residence comes with.

The ticket size criteria need to be increased to at least Rs 80 lakh in a city like Mumbai so that a larger proportion of the population can take advantage of this provision.