Budget 2014: Realty sector's wish list fulfilled
Associate Director-Tax & regulatory services, EY
The NDA Government's debut Budget has a lot in store for the real estate sector. Honourable Finance Minister Arun Jaitley in his maiden budget speech has infused hope & confidence in the stakeholders of this sector. This is a much needed relief after the last few budgets left the sector 'almost untouched' and probably increased the burden through service tax and TDS compliances.
From a policy & macro-economic standpoint, the Finance Minister has allocated INR 4000 cr to National Housing Board to incentivize low cost affordable housing which will enable & facilitate flow of cheaper credit. To support and increase flow of credit to rural housing the allocation of funds to NHB has been increased to INR 8000 cr.
'Housing for All by 2022' was an agenda in the NDA pre-election manifesto and concrete steps are visible through an increase in deduction of interest (on home loans) from INR 150,000 to INR 200,000. This increased deduction will boost demand in the housing sector and encourage individuals to channelize their savings towards investment in property. Further, an increase in the exemption limit available under section 80C from INR 100,000 to INR 150,000 will also result in more disposable income in the hands of individuals thereby spurring the growth of housing.
On the commercial real estate front, a long standing demand of the industry & investors ie tax incentives for Real Estate Investment Trust is a welcome move. The regulations provide that income tax and dividend distribution tax would be levied at the SPV level. Dividend income of the REIT would be exempt and onward distributions by REITs would not be subject to dividend distribution taxes or taxes in the hands of investors. To incentivize creation of REITs, a deferral has been provided by exempting the transaction of contribution of shares of SPVs (holding assets) to the REITs by sponsors.
The sponsor would be subject to tax on sale of units of the REIT. Further, capital gains arising on trading of units of REITs have been accorded similar tax treatment as on trading of listed equities but the holding period has been extended to 3 years for being treated as "long term". Clarity is awaited on FDI in REITs. Though not ideal, the proposals are more or less in line with the expectations and should provide an impetus to launching REITs in India.
REITs will open a fresh source of funding to the cash strapped real estate sector, ease pressure on the Indian banking system and provide a new financial instrument to the common man. While a great step forward, there is a need for more comprehensive tax legislation around REIT's. Issues around direct ownership of assets by REIT's or contribution of immoveable property to REIT's have not been addressed appropriately.
The budget has also brought about liberalisation in the FDI limits in the construction development sector by reducing the capitalization limit from 10 million USD to 5 million USD and the minimum construction area from 50,000 sq meters to 20,000 sq metres. Further, the aforesaid conditions have been removed in case of foreign investment in projects where atleast 30% of the area is dedicated to low cost affordable housing.
Allocation of funds by the Finance minister towards development of smart cities would increase confidence of developers, in entering into development of greenfield smart cities. Smart cities are the need of the hour as they are planned in a manner that prevent issues of overcrowding of cities and lack of infrastructure.
Further, changes are proposed to be introduced into the SEZ policy for revival of SEZs thereby making them effective instruments of industrial production, economic growth, export promotion and employment generation. While change in SEZ policy would encourage their growth, however, in absence of MAT and DDT exemption, from a tax perspective the status of SEZ remains unchanged.
Certain other expectations such as (i) granting 'industry status' to the sector (ii) uniform stamp duty rates (iii) clarification on levy of VAT on construction and development were not met. However, given the short time period available to Mr Arun Jaitley & his team, the budget is encouraging for the sector and we should soon see renewed investor interest.
(Views expressed are his personal)