The recent downturn has hit the realty sector the hardest. From a stage where the cash was chasing limited quality projects, the sector is now facing a severe financial crunch. While the Government with a clear mandate has provided the requisite stability to the economy, it should now focus to retrieve the sluggish real estate sector, being a key driver of the Indian economy.

Real estate in India is the second largest employer next only to agriculture and its size is close to $12 billion, growing at 30 per cent per annum. Growth in the sector has a direct impact on its ancillary industries of steel, cement, etc. In the backdrop of its importance to the growth of the Indian economy, it is vital for the government to nudge growth in the sector to newer heights through fiscal stimulus which would also help make affordable housing a reality and within the reach of the proverbial “aam aadmi”.

As a first step, the government should accord “infrastructure status” to the housing sector and appoint a regulator to act as a single window for overseeing and monitoring the affordable housing agenda. After being hit by the global financial meltdown, real estate developers have now recognized the growing demand for affordable housing. To provide further impetus to this direction of development, the government should consider reinstatement of the tax holiday benefits under section 80IB-(10) for affordable housing projects.

A rise in the limit of interest on housing loans from the existing Rs 1.5 lakh to Rs 3 lakh and a corresponding increase in the tax deduction limit for the principal loan amount would further go a long way to enhance the common man’s appetite for home loans by lowering their tax outflows and hence, making their dream home a reality.

Large-scale developments such as SEZs and industrial parks are the answer to India’s next round of industrial growth. The existing law provides unequal tax structures for SEZs and industrial parks. Despite the latter being granted “infrastructure status”, restrictive and stringent application of tax incentives coupled with delays in timely clearance of applications has seen far and few takers for development of industrial parks. The Budget should provide tax incentives similar to SEZs should to industrial parks. Given that such large developments are a key factor to growth of India’s industrial/commercial sector, there is definitely a case for extending the tax holiday benefits for industrial parks which expired in March 2009, to March 2015 and relaxing the tax holiday provisions.

In the current economic slowdown, Real Estate Mutual Funds (REMFs) could provide the necessary financial support to the cash starved housing sector. However, since its introduction a year back, REMFs have not found any takers due to unclear regulations and absence of guidelines for their tax treatment. Recognizing the need for REMFs as an important capital contributor for the sector, the government should consider aligning the regulations to global best practices, including providing a tax pass through status for registered REMFs.

Separately, outdated and draconian provisions such as Section 50C should be repealed as they result in an unfair basis for taxation. In today’s times, where real estate transactions are governed by market dynamics, applying a notional basis for taxation causes undue hardship to the taxpayer. Section 50C deems the transfer value adopted for stamp duty purposes (i.e. the circle rate) as the consideration for transfer of a capital asset being land or building, where such value is higher than the actual sales consideration. The irony is that these values fixed more than 5 years back have not been brought down even when prices in the real estate market have fallen.

On the indirect tax front, in light of recent clarification issued by tax authorities, credit of service tax paid on construction activities is not available as the output in such case is an immovable property, which is neither ‘service’ nor ‘goods’. This clearly results in input cost burden on developers due to denial of credit of service tax paid on construction activities against output service tax liability. The aforesaid clarification is against the scheme of the CENVAT credit law as the definition of ‘input service’ specifically includes services in relation to setting up, modernization, renovation etc. Accordingly, in order to reduce costs, it should be clarified that credit of service tax paid on construction services would be admissible against output service tax liability of the developer.