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Re-orienting real estate - Policy and governance: operational guidelines - EY - India

Re-orienting real estate

Policy and governance: operational guidelines

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Businesses want to safeguard rather than jeopardize the prospects of future generations, thus leading to the concept of corporate sustainability.

In this section, we discuss operational guidelines on three key policy and governance areas that the real estate sector should focus on.

A. Corporate sustainability reporting


The nature of the construction business has grown to become harmful for the environment. With the global focus on reducing carbon footprint, real estate businesses need to ensure the incorporation of such objectives in their operational strategies.

Numerous initiatives and regulatory bodies encourage businesses to report the economic, social and environmental impact of their operations. This, in turn, gives customers visibility into their ethics and performance.

Sustainability reporting/non-financial or corporate social responsibility (CSR) reporting refers to disclosure of information about social, environmental and economic performance of an organization. 

In the context of corporate sustainability, companies required a common sustainability performance structure/format of a universal nature to facilitate ongoing performance comparison against that of their competitors. This resulted in the emergence of a global standardized framework for disclosure. The Global Reporting Initiative (GRI) rolled out a sustainability reporting framework comprising GRI guidelines to facilitate transparency and comparability among companies and enable a standardized approach to disclosure.

GRI indicators
GRI indicators

There are over 37 sectors that have been reporting through the GRI. The construction sector currently has over 738 companies globally reporting (2011), of which 25 are in the real estate sector.

The real estate sector, by its nature, has significant environmental and social footprints because it requires:

  • Large parcels of land for development
  • Building materials
  • Labor
  • Transportation and related infrastructure
  • Fuel and power
  • Water

At the same time, the sector caters to one of the core needs of the economy by providing housing and other commercial infrastructure. Indian real estate developers are conscientious about these aspects of their business and initiatives such as green buildings are adapted in projects. Yet, there is a need and an opportunity to disclose these to the stakeholders through sustainability reporting.

B. Indirect tax issues for real estate


The real estate sector is estimated to account for about 5% of India’s current GDP and is considered to be the second-largest employer in the country.

However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multifaceted indirect tax levies such as VAT, service tax, excise, stamp duty and registration fees.

Key issues


Some of the key disputes resulting from the service tax and VAT position under the stated transaction models are:

  • Applicability of VAT on construction undertaken by the developer/construction companies before the execution of sale deed
  • Whether the transfer of property in goods takes place more than once under a works contract: Developers usually sub-contract construction activity to third-party sub-contractors.
  • Applicability of service tax on construction undertaken by the developer/construction companies before the execution of sale deed
  • Taxability of joint development agreement

C. Revenue recognition for developers


The increasingly complex nature of real estate transactions has resulted in diverse practices being followed by players to calculate revenue. To make accounting practices uniform, the Institute of Chartered Accountants of India (ICAI) has issued a revised Guidance Note on Recognition of Revenue by Real Estate Developers which now covers various types of real estate transactions such as:

  • Sale of plots of land (including long term sale type leases) with and without development
  • Development and sale of residential and commercial units, row houses, independent houses, with or without an undivided share in land
  • Utilization and transfer of development rights
  • Redevelopment of existing buildings and structures
  • Joint development agreements

The Revised Guidance Note primarily deals with revenue recognition in the financial statements of a real estate developer. This guidance will enhance consistency in the accounting practices of real estate developers and particularly in the application of the percentage completion method. The application of revised guidance could have a significant impact on revenue numbers. Companies need to proactively prepare investors/stakeholders to anticipate and accept the impact of the change.

Profitability remains the primary goal for all businesses. To ensure strong performance and sustainable growth in the face of the numerous challenges, companies should focus on laying down the right policies and processes. Real estate players may have to gear up for a major shift in strategy across the business to accommodate the changes.

 


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