Budget 2017: Q&A with Vikram Chari

     

(The following Q&A with SmartOwner CEO Vikram Chari pertains to the Union Budget announced on 1 February 2017.)

How does the 2017 Budget compare to your expectations?

The real estate industry warrants special attention in the budget because it contributes 15% to India’s GDP. This year’s budget contains some helpful measures; however, it falls somewhat short of supporting the middle class, which is really the driving force of India’s economic growth.

How do you interpret the budget’s focus on affordable housing?

Affordable housing is a laudable aim, so it is positive that the 2017 budget emphasizes facilitating higher investment in it. However, we need to be realistic about what an affordable home is. The current definition is too limiting. It should be expanded to encompass India’s large and growing middle class, especially in the context of rapid urbanization.

The relaxation of FDI norms received some attention in the budget. How does this relate to the real estate industry?

It is welcome news that the Foreign Investment Promotion Board will be abolished. Mr. Jaitley also announced that further liberalization of FDI is under consideration; this should be encouraged. It is perverse that capital-rich developed countries are much more open to FDI in real estate than capital-starved countries. We need to think through our inhibitions about FDI because we are unnecessarily reducing the amount of capital that can come into the country. The real estate sector is a perfect example of this: It is highly capital-intensive, yet capital is expensive and hard for developers to access. The result is fewer properties being constructed and higher prices for end users. Urban Indians pay a higher price for property as a multiple of their household income than the residents of wealthier countries do. In this context, liberalizing FDI in real estate—and allowing people abroad to freely invest in property in India (subject to security safeguards)—can make a big difference to supply and affordability.

What is your take on the new tax-relief measures?

This budget does not contain the hoped-for tax incentives for homebuyers in the middle class, nor does it broaden the tax base. Rather, it seems to employ a populist approach by increasing taxes on the country’s highest earners and halving the tax rate of those earning the least. This line of action is reminiscent of what we saw decades ago and does little to acknowledge the vital trend of India’s burgeoning middle class.

A bright note is that the holding period for property to qualify for long-term capital gains tax will be reduced from three years to two. This will give a significant boost to certain types of property transactions. We would like to have seen more substantial steps in this budget, however, to encourage mid-income earners to invest in real estate.

What is your view on the GST plan?

The finance minister’s affirmation that the GST rollout is on schedule for 1 July is encouraging. It is about time that we created a single national market, and the GST is going to make things much easier for manufacturers and suppliers. This will result in increased efficiencies across the supply chain, and the end result will be lower prices and a more efficient economy.

A change on the capital gains for JDAs was announced. What are the implications of this?

This measure will represent a significant improvement in law. In recent years, landholders entering into JDAs with developers incurred tax liability from the moment they signed an agreement. This was burdensome. The actual benefit of the JDA comes when the project is completed. The new budget recognizes that and shifts the timeline of tax liability to the date of project completion. As JDAs are the most common form of land development in the real estate sector, the impact of this measure will be considerable. It will lessen pressure on developers, contribute to increased supply, and ultimately lead to lower market prices for flats, villas, and plots in gated communities.

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