I n the Union Budget 2017, it was announced that the IT department will soon levy a tax on unsold apartments, which have been vacant for more than one year. With industry sources anticipating the order will be executed as early as April 2018 onwards, industry players are in a fix.
A. Shankar, National Director, JLL India, says certain builders adopt the ‘hoarding’ strategy to create artificial scarcity and this leads to inflated prices. “The fresh tax would be applicable from the next financial year and will be levied on properties held under ‘stock-in-trade’ by developers. The tax rate could be anywhere between 8% and 10% of property's total value,” he says.
It’s evident the Government wants developers to stop hoarding apartments in anticipation of price appreciation, but there are a number of practical issues with the new tax regime, feels Niranjan Hiranandani, President, National Real Estate Development Council (NAREDCO). He says buyers do not wait in line and buy housing units as and when they are available. There are market forces which impact the sale of ready units and most importantly, the prevailing economic conditions affect buyer sentiment. “Developers have no control over any of these aspects and cannot ensure that ready possession units get sold within this one year deadline,” he says.
Possible benefits
Developers might be significantly impacted by the move but consumers have a lot to look forward to.
With the current vacant supply hitting the market soon, buyers can expect a reduction in prices. In cities such as Delhi-NCR and Mumbai, unsold inventory levels are very high and the new tax could result in a steep price correction, says Shankar. Other benefits include: a reduction in unsold inventory, lower prices, increased Government revenue, opportunity for alternate asset classes such as co-living and rental housing and overall price corrections.
Disadvantages
Most players believe that the timing for such a move is unfortunate. Contrary to the belief that developers are hoarding, they say, in reality they are struggling to sell properties even at reduced prices. “Builders are making a loss in whatever they are selling today and are struggling to pay back the loans with high interest rates,” says Dr. R Kumar, Managing Director & Chairman – Navin’s.
If unsold properties are going to be taxed, developers will hesitate to launch new projects unless there is a sale guarantee. RERA stipulates that properties cannot be sold without all approvals in place and even after getting all the necessary documents, if only a few units are sold, the builder has to complete the entire project. Added to that is the pressure of paying tax on the unsold units. How is this fair? asks Kumar.
Speaking on similar lines, Hiranandani wonders that if builders are unable to sell at prevailing points, are they expected to sell at a loss? “If such a scenario is envisaged, will developers want to build housing units unless they have committed buyers?”
Impact on industry
Given the new rule, developers may slowdown their construction speed to match with the sales velocity. At the onset, such an IT directive may not be completely in favour of the free-market regime that the Government intends to achieve within the sector. “In the short run, this could result in a price correction but in the long run, developers might be hesitant to undertake large township-style projects,” adds Shankar. Also, new supply will be only bought-in once demand for it has been registered.
Instead, the entry of more competitors should be encouraged (many weak/fraudulent ones have been wiped out post-RERA). The consistent release of land parcels and faster project approvals to create enough supply is crucial. Ravi Ahuja, Senior Executive Director, Mumbai & Developer Services, Colliers International India, says in most cases, any additional outflow from the developer’s end on any project, ultimately impacts the buyer. In the current scenario, however, where the residential sector is reeling under pressure, he feels the new move will not result in any price increase.
Luxury trends
Trends indicate that apart from affordable units, the luxury segment witnesses maximum launches. But given this new tax segment, one can expect fewer launches and perhaps an invite-only sale process. The luxury sector, the most impacted asset class, will see few takers in the coming months.
Data suggests that a considerable portion of unsold units currently lie in the premium and luxury segment. The tax initiative will impact new supply to a great extent as developers will be wary of constructing prior to witnessing healthy demand.
