Modi Govt Cuts Real Estate Taxes by 87% in Run-Up to Election

India’s Goods and Services Tax Council announced on Sunday that the country would lower taxes on unfinished and affordable homes, as Prime Minister Modi’s ruling Bharatiya Janata Party strives to boost the real estate sector ahead of the general elections in May.

Under the new tax regime, rates will fall from 12 percent to five percent on unfinished residential developments, and from eight to one percent on affordable homes. The new policy, effective April 1st, will cover 90 to 95 percent of housing sales in India’s tier two and tier three cities, and close to a third in the country’s top metropoles, according to a government source cited by Bloomberg.

To qualify for the affordable housing deduction, homes in metropolitan areas including Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Mumbai, must be valued below INR 4.5 million ($63,000), and have less than 60 square metres of construction area. In other locations, units up to 90 square metres will qualify.

A Boon for Buyers

Knight Frank India’s chairman Shishir Baijal, cited by Indian financial newspaper Mint, said the measure could reduce net costs for buyers by six to seven percent, which would help bring down India’s unsold inventory.

The measure is expected to shift demand from completed to under-development housing. According to Santhosh Kumar, vice-chairman of Mumbai-headquartered Anarock property consultants, there are approximately 5.88 million unsold properties under construction, 34 percent of which would fall under the affordable housing category.

“Most players currently have considerable unsold stock within this segment. With interest rates also stabilising, and expected to go down further, this is a positive for companies,” said Alok Ranjan, head of research at stock brokerage platform Way2Wealth, cited by Indian news outlet The Economic Times.

Shares of Indian developers, including Indiabulls Real Estate, Godrej Properties, Oberoi Realty and Sunteck Realty have risen from 3.5 to seven percent since the measure was announced on Sunday. The Nifty Realty Index, which tracks ten of the largest locally listed developers in the country, rose 2.8 percent in the hours after the announcement, after falling 33 percent last year.

Political Victories, Fiscal Losses

The tax announcement comes a month after Indian government bonds fell to their lowest levels in eight months on February 1st, as investors concerns about the Modi administration’s perceived lack of fiscal discipline flared. Yields on the 2028 bonds rose 0.13 percentage points to 7.62, and yields on debt due in 2029 increased 0.09 percentage points to 7.38 percent. It is has also been less than three months since Urjit Patel, governor of the Reserve Bank of India, quit after attempting to stop the Modi administration from dipping into the Reserve Bank’s capital.

This is the eighth time taxes have been lowered since the Goods and Services Tax (GST), which was aimed at simplifying a number of tax areas, came into force in 2017. Four of the eight reductions were announced in the months leading to state elections. In November of 2017, and in January of 2018 the government cut a cumulative INR 212 billion in taxes ahead of the December 2017 and February 2018 votes, according to Bloomberg’s calculations.

In July of this year India’s government cut an additional INR 150 billion in taxes ahead of elections held in the fourth quarter, in which the Modi’s Bharatiya Janata lost three states. While finance minister Arun Jaitley has told the media that this latest cut would be revenue neutral, the current rollback is expected to cost the government somewhere in the vicinity of INR 55 billion.

In a recent speech, finance minister Piyush Goyal said the government will borrow INR 7.1 trillion in the coming fiscal year, which starts in April — 25 percent more than in the current fiscal year.