IEB reader Durgesh Prasad, sent in this idea, via email to some of the IEB contributors.
In today’s slow economy, where government is trying its best to keep the real estate market rolling and attracting investors to invest in real estate market in order to keep market live, I had an idea through which it can be achieved by government without loosing anything. Presently, the deciding period of differentiating a CAPITAL GAIN as Short term or Long term is 3 years period. If one sells his new house in less than 3 years and incurs profit, the gain is termed as Short term capital gain. And if he sells his new house after 3 years and incurs profit, the gain is termed as Long term capital gain. Now there is no way to avoid tax in short term capital gain, whereas there is way to save tax in long term capital gain, if the profit incurred is re invested in another residential house of price more than the profit.
The above way of saving tax from long term capital gain will help in rotating money in market to some extent, as it will result in at least two transaction of selling and buying a residential property. Considering this advantage, if Government can REDUCE The differentiator period from 3 years to say 2 years, then the market player who might be waiting for next year to sell his house to re invest, may do it so today and in a way will improve rolling of transactions in Market. Government will not loose anything , but will just be helping in moving the selling environment for its public to one year sooner. ( later on when economy improves, the years can again be raised to original 3 years )
IEB reader Piyush Goyal (email@example.com) sent in the following comment -
Good idea without working out Revenue ramifications for the Govt. – Decreasing revenue would lead to further increases in deficits. Not a desirable side effect of the Capital Tax change prescribed.
Real estate in India was a bubble that needed to be pricked and was rightly so in this current market turmoil. The bubble was largely an effect of $’s looking for homes. As $ flow reversed course (for a myriad of reasons including margin covers, unwinding large diversified derivative positions etc etc), the bubble burst. My guess is that the affordability index of residential properties reached heights never seen in the Indian market during this bubble and popping of the bubble was a good thing. The 3 year lockdown on Cap-Gains is a great policy that needs to remain. MY TAKE – Real Estate (Residential Real Estate) should in a country like India never become an investment asset. No more Cap Gain benefits, not even after 3 years holding period.
One school of thought blames the “CapGains Clause” and “Income Tax gains on Interest Payments” as the excacerbating cause of the bubble in the Real Estate space in US and the resultant crash.
As the situation around the globe/US improves over a period of 3-4 years, the tremendous amounts of $’s being printed by the US Fed will once again look for homes to park and India will once more be ripe for a bubble of sorts in the RE space.
India needs to manage not just this current slowdown but also the impending bubble that might follow. Monetary policy cannot be ad-hoc and directed towards one marketplace or another, but deliberate and planned affecting prices across the economy – It should not cause bubbles and rolling recessions, instead should be used to smoothen the growth rate of the economy/GDP to Trend Growth Levels. Price stability is tantamount not fixing a market or two.
The sincere thoughts of the writer are appreciated but slowdown in a sector (mostly irrelevant and excess prone sector like RE) cannot and should not be cause for myopic policy – Long Term (Medium Term at the very least) price stablity should be the goal of both Monetary and Fiscal policies.