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Abolish Capital Gains Tax On Residential Real Estate

Abolition of the capital gains tax on residential real estate transactions for 10 years will galvanise the secondary market in housing

A recent report states that residential real estate prices have dropped 2%-9% across India because of the prolonged lockdown. Other articles from journalists who cover the space have speculated about an expected 20%-30% drop in residential real estate prices. All as a consequence of the economy in crisis. However, inelastic urban and metro land prices and inflation alone would dictate against this. It is an oft-ignored fact that real estate prices, all categories, at a minimum, tend to keep up with the most of inflation. A person is assured, even in a bad market in India, that his flat or house will appreciate 10% per annum pro-rata over a period of ten years. How many can say that any more about highly volatile Indian equity in a ruined economy?   

This low pricing now for residential real estate is on top of price stagnation over the last few years due to apparently massive over-supply and the absence of speculators and investors.

Though it is remarked quite often that demonetisation and the advent of GST contributed quite a bit to the decline of enthusiasm for residential real estate. Nevertheless, Builders are said to have an estimated Rs. 3.7 trillion in unsold inventory, according to international real estate brokerage JLL.

The end-users too are either waiting for further drops in pricing from a beleaguered real estate industry, or a better atmosphere of economic certainty and the prospect of sustained job security and cash flows. This, of course, might be a year or two in the coming. Most companies, both in the organised and unorganised sector, will need this sort of time to recover to full strength.

While real estate is composed of residential dwellings, commercial office and retail space, hospitality in terms of hotels and resorts, and land; it is the residential segment that is stagnating the most.

With recent government initiatives such as REIT, a government stimulus of Rs. 25,000 crores for stalled residential projects, the ingress of private equity and venture funds from abroad investing, money has flowed in, but mostly into commercial and retail development.

Land is increasingly being organised on the basis of a collaboration between developers and landowners, given its very high cost. This works well for the economics of ventures that would otherwise flounder on this very first requirement.

Together, and not counting the government’s hyper infrastructure building and modernisation drive, this real estate sector has   projected some very encouraging numbers running into hundreds of billions of dollars in every reported instance.

For example, the real estate sector, housing, hospitality, offices including SEZs, retail, has the potential to reach a market size of $ 1 trillion by 2030. This is up from the modest $ 120 billion in 2017. It potentially can contribute, though statistics can be misleading in a deeply depressed economy, 13% to 17% of the economy.

The real estate sector can quickly ramp up, once again, and contribute the second largest number of jobs to the economy too.

When these are spread out around the country, not just in the six metro cities, but another 24 smaller ones, and some 200 sizeable towns, it makes for something of a panacea, particularly for the artisanal class and unskilled labour. Not to mention the professional classes and the large number of industries that supply to construction.

That farming absorbs the largest number of people in rural India is not surprising, given the mostly manual, over-manned rural landscape. But does it really pay? If it did, you wouldn’t have lakhs of migrant labourers. A large number of these migrant labourers work in real estate and in those companies that supply goods and services to real estate.

Given the very difficult current situation, the ruling NDA needs urgent remedy, shorn of some of its more squeamish feelings about the cash economy. It should think only of such measures that will yield quick results in the first instance. One of them is certainly to revive demand in the residential real estate sector.

A first task should be to absorb the unsold houses and free the capital stuck. It belongs to hapless would-be homeowners who have paid instalments, the over-extended Builders, NBFCs, investors and Banks that have lent them the money.

For primary buyers, the stamp duty should be capped at a uniform 2% of the circle rate countrywide, making it easier and cheaper to take over and register properties. None of this should be much of a revenue loss for the government that has quietly added both GST and VAT to the purchase price in any case.

This has inflated purchase cost by 10% to 20% for the buyer, without recourse, and after he has booked the flat when these taxes were not applicable. His calculations on both price and delivery have gone badly awry. This has resulted in extended rent payments in many cases, and housing loan EMIs against a flat that should have been delivered in three years, but is stuck sometimes for 7 to 10 years instead.

Abolition of the capital gains tax altogether on residential real estate transactions for a period of ten years will galvanise the secondary market in residential houses. This will likely wipe out the unsold inventory, with investors and speculators flocking to the business opportunity. And it is these investors and speculators that can buy and sell large numbers of flats for the arbitrage, even in the near absence of end-users reluctant to make expensive commitments at this time. It is this speculation, philosophically repugnant as it may be to the current government, that has been the lifeblood of the real estate industry throughout the comparatively buoyant UPA years.  

People in general should be encouraged to purchase houses for  their own use of course. But having said that, there should be no  tax consequence as to number of flats purchased and sold as stock-in-trade apart from the normal corporate or individual direct taxes applicable. There is nothing wrong in the citizen regarding real estate as a solid business opportunity even if it does not want to live in the house or flat it is buying.

Residential and Office rentals as a category of income should also be rendered tax free for a period of ten years. This will encourage the animal spirits that have been dampened to the point of extinction at present. The time has come to look upon the real estate sector, along with infrastructure, as an economic catalyst, massive job creator, growth multiplier. It can be a saviour in tough times.

Gautam Mukherjee

By Gautam Mukherjee

Commentator on political and economic affairs

One reply on “Abolish Capital Gains Tax On Residential Real Estate”

State and central governments must come together and act decisively in favour of house owners. The tax rate of 10-12% of stamp duty is very steep. On top of it the sword of high capital gain tax forces one to decide on buying property of equivalent rate even if one is not interested in. Instead the unused expenditure can be allowed in lockable MFF and not bank account as that does not give any good return.