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Realty sector needs more reforms to realise full potential
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Top Stories |
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Vinod Behl | 15 Aug, 2018
Landmark reforms like RERA and GST, as also demonetisation, have brought
about much-needed transparency in transactions, helping the real estate
sector to free itself of fraud, malpractices and other problems faced
by consumers and investors. Yet, the sector needs more reforms to break
free of the various ills that still plague it in order to realise its
full potential as a major contributor to the country's GDP.
The
reform-oriented Narendra Modi government, which is fine-tuning and
reinforcing the reforms undertaken by it to increase their on-ground
efficacy, has its task cut out to free real estate from high transaction
costs, especially to achieve the success of its flagship mission of
"Housing for All".
Though the interest subsidy scheme (CLSS)
under the Pradhan Mantri Awas Yojana (PMAY) has proved to be a big boost
for first-time home buyers in the EWS, LIG and MIG category, yet high
transaction costs are a deterrent to home ownership. Currently, GST,
stamp duty and registration costs act as a dampener. There is an average
stamp duty of six percent and it is not uniform and is much higher in
some states. Further, in many cities, there is the anomaly of collector
rates of property being higher than the market rates.
As such,
home buyers end up paying more stamp duty and registration fee. Home
buyers need to be given freedom from high transaction costs to boost
sales and revive residential real estate, facing a slowdown for long.
And this can be achieved by either rationalising stamp duty or simply
subsuming stamp duty in GST. Similarly, while GST has imporved ease of
doing business by doing away with multiple taxation, there is still a
need to lower its 12 per cent rate, which is almost double the VAT and
Service tax prevalent in pre-GST era, especially when Input Tax
Credit provided by the government is not having the desired effect.
Further, the high GST on cement should be brought down as in the case of
paints, to bring down the cost of homes.
Home buyers also need
freedom from the double burden of rent and EMI, particularly as hundreds
of thousands of housing projects across the country are facing long
delays. Earlier, the home buyers would get possession of their homes in
3-4 years but now, in many cases, it has almost doubled, causing great
hardships to home buyers in terms of dual burden of rent and EMI. Some
developers are helping home buyers tide over this problem by offering
schemes to pay EMI only after possession. But ready homes is a sound
solution to this problem as they do not have any development risk and,
moreover, home buyers save on 12 per cent GST.
That's why
ready-to-occupy homes are being lapped up by home buyers. Here, the
concept of "Build and Sell" can provide a long-term solution. Under
RERA, a developer can't start his project without land and all mandatory
permissions in place. Also, there is not only a ban on funding projects
through customer advances by way of pre-launching of projects but there
is also a strict check on (mis)utilising funds collected from customers
through the implementation of the escrow account mechanism.
As
such, it makes sense for developers to adopt the "Build and Sell" model
which is common in advanced countries. Leading developer DLF has already
announced it would adopt this model. And, if the government organises
cheap bank funding for at least developers of affordable housing, many
of them will take to "Build and Sell", to the advantage of property
consumers.
Red-tapism is also proving to be a big bane of the
real estate sector as the unduly long time taken by authorities in
giving construction permits and other multiple sanctions adds the
developers' debt, in turn increasing home costs. And, since the
sanctioning authorities do not come under the purview of RERA, there is
no check on project delays due to the unduly long time taken in
according project sanctions and giving completion certificates.
The
ideal solution to this problem is a single window mechanism for project
sanctions/clearances. Since this is not happening, the government
should fast-track the process of online permissions/sanctions and make
this time-bound.
Last but not the least, there should be freedom
from defective and fraudulent land/property titles to make property
transactions easier and safer. Thus, there is an urgent need to set up a
Land Titling Authority in states to prepare and maintain a digitised
registry of all immovable properties. This, together with introduction
of Title Insurance for providing protection against any financial loss
due to title deficiencies, will considerably help in enforcing contracts
and prevent property deals from falling through, thereby effectively
checking high litigation due to property ownership disputes.
The
transparency brought in by this will further boost the confidence of
foreign investors, thereby helping in putting foreign investment in
Indian real estate on the fast track.
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