Do tax breaks make houses unaffordable?, Harish Rao

Do tax breaks make houses unaffordable?, Harish Rao

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‘The government which has a noble objective of providing houses for all by 2022 should not end up creating another housing bubble’, Harish Rao, Founder, sawdust

Do tax breaks make houses unaffordable-min

Do tax breaks make houses unaffordable-min
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In order to promote affordable housing, the government has made several efforts to create enabling environment and eco-system. Towards such an end, the Government has granted infrastructure status to affordable housing which will enable these projects to avail the associated benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital

Roof over one’s head is a dream, an ambition, a goal for many and also at times confirmation of professional success. The government has set itself an ambitious target of providing housing for all by 2022. Thus, housing is a major issue in India where lot of discourse is going on to make it affordable.

According to HardeepPuri, Minister of State of Housing & Urban Affairs (I/C) the nation has the mammoth task of constructing about 12 million houses under EWS/LIG segment of the society in order to achieve the goal of ‘Housing for All’. In order to promote affordable housing, the government has made several efforts to create enabling environment and eco-system. Towards such an end, the Government has granted infrastructure status to affordable housing which will enable these projects to avail the associated benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital. The announcements were also made pertaining to the affordable housing such as profit-linked income tax deduction, relaxations on tax for vacant/unsold units for 1 year, counting of the carpet area instead of the built up area of 30 and 60 sq.m., among others.

Further, one can claim tax benefits on home loan for both principal repayment and the interest paid. Principal repayment qualifies for tax deduction under section 80C of the Income-tax Act, 1961. Apart from principal repayment, you can claim deduction of up to Rs2 lakh for interest payment on home loans under section 24(b) of the Act. 

In addition to these benefits there is a Section 80EE which was first proposed in the Union Budget 2013-14, and was initially meant to be in force for 2 years only (financial years 2013-14 and FY 2014-15) but has been continued till date subject to fulfillment of certain conditions. To avail benefits under this section, the home loan should have been sanctioned during or after FY 2016-17. The loan amount should be less than Rs35 lakh and house value should not be more than Rs50 lakh. Apart from that, the homebuyer should not have any other existing residential house in his/her name while buying the house.

No doubt, the government is doling out so many concessions to housing sector and home buyers. But some economists and experts have always talked against some of the government subsidies and incentives to housing sector. They believe, these concessions fail to realise their original objectives in the long term and start having impact on the opposite direction.

“Major reason for housing unaffordability is the tax incentives provided by the government which encourages homeowners to see house property as an investment,” says an economist with a private bank. Look at some of the tax breaks (under section 80C and 24(b)) introduced by the then Finance Minister, Yeshwant Sinha in 1999. These were mainly introduced to to revive the realty sector which was facing prolonged phase of slowdown. Indeed, the tax breaks had the desired effect of reviving the realty sector but their continuation to infinity resulted house prices touching the sky. House prices went up by 6-10 times during the period from 2000 to 2013 making them beyond the reach of the common man which was not the objective when the incentives were originally introduced. Major reason for housing bubble created then was the tax breaks, most of which were demand side incentives.”

In the Discussion Paper on Direct Tax Code issued in 2010, it was stated that “Ordinarily, tax incentives are inefficient, distorting, inequitous, impose greater compliance burden on the tax payer and on the administration, result in loss of revenue, create special interest groups, add to the complexity of the tax laws, and encourage tax avoidance and rent seeking behaviour.” The Parliamentary Standing Committee on Finance had recommended a comprehensive review of the tax incentives so that they are limited and confined to exceptional cases. It is also true that exemptions and incentives once granted tend to continue even if the objective has since been met and even if alternative and more transparent mechanism is available for achieving the desired objective.

Shome Committee in its report, Advisory Group on Tax Policy and Tax Administration for the Tenth Plan said “Overall, the incentives are also iniquitous in that the manner in which they are offered tends to favour the richer tax payers.” The Committee favoured investment-linked incentives/exemptions with the focus on crucial sectors of the economy.

Kelkar Task Force on Direct Taxes observed that: The richer sections of society are being subsidised to purchase their own dwellings, which can hardly be justified by a fiscally constrained economy, which is aiming to reduce subsidies on food and fuel. If a housing subsidy ought to be given, then it should be directed only to low-income households. People in low income group whose income is less than the tax exemption limit receive no tax subsidy for loan repayment for their own dwelling for the simple reason that they are not tax payers.

At the same time, it should also be remembered that housing is a basic necessity. It is true that the empowerment that comes from home ownership helps to generate improved outcomes in education, employment, health and lifestyle, over a period of time, for both children and parents. Studies have also shown that by owning a house people become more independent, less reliant on government services and more engaged with their community. If housing problem is solved many other challenges faced by the poor and disadvantaged can be tackled by using their own skills and resources. Thus, by providing own houses not only the problem of roof over one’s head can be met but also many other economic advantages can be derived out of it.

Tax breaks, if at all necessary should be time specific and should be provided only for a limited period of time. However, tax incentives once given are seldom withdrawn, fearing the wrath of voters. Providing subsidy to construct affordable houses, as has been done in Telangana, by way of supply of main materials like sand, cement and steel at concessional rate can be effective in serving their purpose provided there are enough checks to prevent leakages and misuse. Providing interest subsidy will benefit poor and lower income group more than the concessions given under 80C or 24(b). Remember, there is a large section of population which derives its income from non-taxable sources like agriculture. For them benefits under 80C or 24(b) are of no use.   

Various committees and institutes have pointed out deficiency of some of the breaks given by the government. Further, government should also learn lessons from its past deeds and come out with effective incentive system which helps only the needy. The government which has a noble objective of providing houses for all by 2022 should not end up creating another housing bubble.