Published Editorial

Arun Jaitley Should Offer More Tax Sops for Real Estate Sector

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NDTV Profit

By

Maadhav Poddar
Associate Director
Tax & Regulatory Services, EY

Real estate contributes significantly to the GDP of the country, but continues to be largely unorganised. High transaction costs, high interest rates coupled with credit crunch, non-standardised bye laws and restrictive legislations are the main impediments to the growth of the sector.

The sector has a huge multiplier effect on the economy so it is imperative that growth of the sector be maintained and policies and incentives that aid the development of the sector are introduced.

Last few budgets have left the real estate sector almost untouched. Developers, investors and consumers are wading in troubled waters due to reduced demand, litigation around land acquisition, delayed approvals, liquidity crunch and projects stuck mid-way.

In view of the existing situation, Finance Minister Arun Jaitley should provide both fiscal and non-fiscal measures to give a boost to the sector. Some of the key expectations of the sector from the forthcoming budget are:

1) Cascading effect of stamp duty has been a major reason for non-registration of deals and for alternate conveyance options leading to creation of black money. Introduction of uniform stamp duty rates and stamp duty credit will reduce costs for ultimate buyers and foster transparent deals.

2) Currently, a deduction of Rs 1.50 lakh is permitted in relation to interest on loan borrowed for acquiring or constructing a house property. This limit of Rs 1.50 lakh was introduced a long time ago. Given the increase in property prices and also to spur the demand for housing, an increase in this deduction to Rs 5 lakh should be considered.

3) Ambiguity remains around characterisation of rental income as house property or business income. Such characterisation done by the developers is often challenged by the tax authorities. Such characterisation should be clarified so as to ensure that uniform practices are followed across industry and litigation arising in this regard is removed.

4) Tax holiday available to affordable housing allows 100 per cent deduction of capital expenditure in the first year of business set-up. Currently, this deduction does not benefit developers since the business of developing housing project does not involve capital expenditure as the construction and land is stock in trade and not a capital asset. Therefore, there should be a specific clarification stating that land cost would be included while providing this deduction.

5) Section 194-IA of the Act provides that every transferee at the time of payment or credit of same as a consideration for transfer of immovable property to resident transferor shall deduct tax at 1 per cent on such sum. In view of the practical difficulties in complying with the provision and hardship on real estate companies who would be burdened with the task of substantiating the claim for tax deduction, section 194-IA should be deleted.

6) The Supreme Court in a recent decision upheld levy of VAT by the state on sale of under-construction property holding that the same amounts to work contract. Post the said decision, VAT authorities in many states have started issuing notices to real estate players demanding VAT on such transactions. However, the decision has led to increased ambiguity with respect to determination of taxable base for levy of VAT on sale of partially developed flats, applicability of VAT on re-sale under-construction flats, liability on individuals to deduct work contract TDS, etc. Such ambiguities arising out the decision should be clarified so as to avoid confusion in the minds of the parties and avoid unnecessary litigation.

7) Steps should be taken to institutionalise the real estate sector to achieve quicker and easier financing for projects and give developers an alternate source of funding. This can be achieved through i) Liberalisation of foreign direct investment (FDI) regulations for real estate sector and wider access to financial markets; ii) The real estate sector should be granted "industry status" which will enable it access debt funds at low interest costs and reduced collateral values, and iii) Special Economic Zones (SEZs), which were once considered as tax free enclaves, have lost their attraction due to withdrawal of MAT and DDT exemption. Investors in SEZs with a long-term development vision are exploring avenues for exit through de-notification. Restoring DDT and MAT benefits could help in salvaging SEZs.

8) The Securities and Exchange Board of India (Sebi) recently issued draft regulations for Real Estate Investment Trusts (REITs) for public comments. REITs could have a significant positive impact on the sector and economy as a whole by i) providing a new funding avenue to developers; ii) reducing exposure of Indian banking system to the sector; iii) providing a productive investment avenue for channeling household savings, and iv) reducing black money.

Other than the recommendations proposed in the Sebi regulations, relevant changes should be introduced in the income-tax laws and foreign exchange laws to ensure that REITs kick-off in the intended manner. Such changes would include i) One-time capital gains exemption to sponsor of the REIT; ii) One-time exemption on transfer of assets by sponsor to the REIT from stamp duty levy under states laws; iii) Securities Transaction Tax (STT) and Capital Gains Tax implications on sale of REIT units on the stock exchange should be made on par with listed equity shares; iv) Income tax should be exempt in the entire chain of the REIT. If at all one could consider levying a 5 per cent distribution tax when the REIT distributes income to investors, and v) RBI should clarify that foreign investment in REITs is permitted both under the Foreign Institutional Investor (FII) / Foreign Portfolio Investor (FPI) and Foreign Direct Investment (FDI) schemes under the automatic route.

The opinions expressed here are the personal opinions of the author.