Ways to provide Affordable Housing in India-the US way

Housing for the urban poor has been one of the most contentious issue
plaguing our countries policymakers post-independence. India could be the only
country with the dubious distinction of treating purchase of a property under
construction from a developer as 1) Transfer of property attracting stamp duty
(2) as sale of goods under VAT rules and (3) to make matters worse, as a
service under the Central Government service tax rules. Central/ state budgets
have come and gone without giving any relief on applicability of multiple taxes
to the same real estate transaction. In such a scenario where multiple taxes
are levied on the same real estate transaction, developers nor any financial
institution derive any incentive of providing home for the poor.

It was not until 2005 that the Indian Government finally took cognizance
of lack in urban infrastructure including housing and rolled out the Jawaharlal
Nehru National Urban Renewal Mission (JNNURM) with lot of fanfare. This was
followed by UPA government’s announcement of its ambitious project called Rajiv
Awas Yojna (RAY) in August, 2010 to extend support to JNNURM with a mission to free India of slums .Further, the finance bill introduced on July1, 2010 announced exemption of service tax for all low cost housing (property below 20 lakhs)covered under the aforementioned schemes. Through a slew of subsidies and other incentives the government has made an honest attempt to address the housing issue but has failed to make an impact by far.

Delving deeper into the issue of why these proactive schemes in India
have failed to deliver so far, we may look for answers from the distant shores
of US. The Federal Government has been able to stir investor’s confidence with
a potent incentive called Low Income Housing Tax Credit (LIHTC also popularly known as section 42 credit).This is a dollar-for-dollar tax credit in the US for
affordable housing investments. It was created under the Tax Reform Act of 1986
that gives incentives for the utilization of private equity in the development
of affordable housing aimed at low income Americans. The tax credits are more
attractive than tax deductions as they provide a dollar-for-dollar reduction in
a taxpayer's federal income tax whereas a tax deduction only provides a
reduction in taxable income. The bottom line fact that LIHTC accounts for
nearly 90% of all affordable rental housing created in the US today narrates
volumes of its success. However, the buck does not stop here. The next hurdle
which the government faced was to provide “capital at low cost” to these investors.The answer came in the form of “tax exempt bonds” .These tax exempt bonds are issued by government entities and are sold to market through
underwriters/placement agents, the proceeds of which go to the investors. Federal banks have also joined hands to fund such community development projects by offering a>standby letter of credit backing the tax exempt bonds or by b>purchasing these tax exempt bonds. Since these bonds are issued by government entity and are backed by banks, these bonds enjoy high credit rating and hence are priced low, in turn providing the much needed capital in the hands of the investors at a reasonably low cost.Thus with some of these suggested measures India may be in its way to make the dream ‘a house for every Indian’ a reality.