Nation: Urban Land Ceiling; Let There Be Land

The Government hopes to boost the real estate industry and release land for housing by introducing a slew of fiscal incentives alongside legislative changes.

It is a law everyone hated. The Urban Land (Ceiling and Regulation) Act (ULCRA) of 1976 is one of the populist sops that Indira Gandhi doled out to legitimise the Emergency. It put a ceiling on vacant land, imposed limits on plinth area for future development and gummed up the works for transfer of every valuable urban property. Thanks to the Act, it was impossible for a land-holder with even a medium-sized plot to build or to sell it unless, of course, he could secure exemption from the state government. This "exemption" became a money-spinner for politicians.

The law was due to be scrapped last year by former prime minister Inder Kumar Gujral, almost as an act of penance for having piloted the bill 22 years ago as works and housing minister under Indira Gandhi. The collapse of the Gujral government gave the law a breather. However, it is the turn of Ram Jethmalani, urban affairs and employment minister in the BJP-led Government, to deliver the coup de grace to the Act, which is waiting to be repealed in the current budget session of Parliament. Two state legislatures, Punjab and Haryana, have already given consent to the repeal, as required under Article 252 of the Constitution, which lays down the procedure for Parliament to legislate upon "state list" subjects like land. Even West Bengal, the most enduring bastion of official socialism, has agreed to the repeal, with the rider that it would have its own ceiling law afterwards. Nevertheless, the state governments are of the view that the Central Act should go anyway. Jethmalani says there is "a widespread clamour for removing this most potent clog on housing".

The speed with which the Government took the decision has taken the building industry by surprise. The Atal Bihari Vajpayee Cabinet, meeting the day after the May 11 nuclear tests, proposed that apart from repealing ULCRA, all unused land be returned to original landowners by the state governments if they paid back the compensation given at the time of acquisition. The repeal will, however, not affect land on which building activity has already commenced.

In the entire period of the law's operation, only 19,020 hectares of urban land was acquired. It is barely 9 per cent of the vacant land of 220,674 hectares estimated to be in excess of ULCRA. Besides, 61,967 hectares were given back by the governments, particularly chief ministers, on grounds of "public interest" or on account of "undue hardship" as provided for in the law, to the landholders. ULCRA has, therefore, failed in its primary object of mass housing for the poor and has instead created an artificial scarcity of urban land. Now, after putting an end to the mockery of a ceiling law, the Government is taking a series of steps to encourage housing. Says Jethmalani: "We expect to increase supply of land in urban areas and boost housing activity."

For this, his plan is to introduce a slew of fiscal incentives (see box) which, in addition to the legislative changes, will help restructure and reform the real estate industry. The Government plans to grant infrastructure status to housing, and treat the sale of a house against foreign exchange as export, with the accompanying tax benefits. Besides, the unsold houses left with builders will be treated as stock-in-trade, exempt from wealth tax.

"Our target is to build one crore houses at the rate of 20 lakh dwellings a year," explains Minister of State for Urban Affairs Bandaru Dattatreya. He says it will make an impact on the steel and cement industry, generating significant employment growth. Both real estate and housing industry sources are upbeat about the new housing policy. Niranjan Hiranandani, chairman of Hiranandani Constructions in Mumbai, says, "Granting infrastructure status to the industry and providing tax concessions to housing finance companies will be steps in the right direction."

The "infrastructure" status is important because the sectors defined in this category for tax breaks under the Income Tax Act do not include housing. K.P. Singh of DLF Industries says the infrastructure status for housing should enable the industry to have "complete tax holiday for the initial five years" and income tax deduction of 25 per cent of profits for large-scale real estate development. The extent of tax concessions for the industry, and for the ordinary citizen building a house, will, of course, depend on the budget. But Jethmalani is optimistic: "I have told the finance minister and the prime minister that the state must reward house-builders by making the loan as well as the interest exempt from income tax."

However, industry circles, though upbeat about the repeal of ULCRA, have a lurking fear that the proposed changes may suddenly push down property prices. Their misgiving is that, after the repeal of ULCRA, there will be an abrupt increase of supply in the property market, swamping demand. There are already signs of a slump. In 1995, a 1,200 sq ft property in Malabar Hill would have fetched Rs 40 crore, but there are no takers for it today even at Rs 10 crore. D.G. Bahri, director of Unitech Limited, says: "The repeal of ULCRA will lead to an inevitable downward correction of prices." Maharashtra's Housing Minister Raj Purohit warns: "Low property prices may slow down construction activity."

Jethmalani says that urban property prices were jacked up artificially because of "bad speculators and worse laws". He expects urban houses to become "affordable" for the common man as a result of the policy changes. However, many developers feel that the falling prices may remain a short-term trend unless there is a reform in the property market. P. Mahantu, chairman of Kalpataru Constructions, earnestly hopes that the state governments do not bring in a substitute for ULCRA. HDFC Executive Director Deepak Satwelkar feels that state laws are oppressive. "In Mumbai, a developer needs 57 approvals from the corporation before starting construction." The other hurdle is rent-control law, a state legislation which has made tenancies perpetual and inheritable. Any law that tends to govern tenancy is bound to touch a political nerve. Example: the 1995 Delhi Rent Control Act, which is not notified yet.

By rolling out a policy package for housing, the BJP-led Government at the Centre is obviously signalling to the urban middle class that it means business. However, the final success of reform in housing will depend on the extent to which the state capitals and the municipal corporations simplify the rules and reduce the area of their discretion.

THE JETHMALANI PACKAGE

REPEAL OF ULCRA: Out goes the concept of "ceiling" on urban property, making supply and demand determine prices.

INFRASTRUCTURE STATUS: By giving housing this status, the Government can give tax holidays to building firms, a facility now only given to road, port, airline and telecom projects.

FOREX EARNING: If a housing project is sold against foreign exchange, the seller gets the "deemed exporter" status and is given income-tax exemption. This will apply to sale of property to NRI buyers.

INCOME-TAX EXEMPTION: To make both loan and interest payment for house-building allowable for exemption. At present, only a rebate of up to Rs 10,000 is allowed on interest payment under Section 88 of the Income Tax Act.

DEPRECIATION: The package offers full depreciation of buildings in 10 years at the uniform rate of 10 per cent, irrespective of the plinth area.

BUILDING AS STOCK-IN-TRADE: Makes housing assets eligible to be held as stock-in-trade for the housing industry so that unsold buildings do not attract wealth tax.

CARRY FORWARD/SET-OFF: Losses in a housing project can be transferred from one year to another to suit the tax advantage of the building firm.