Published Editorial

Budget 2013 can improve Real Estate sentiment

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The Economic Times

by

Gaurav Karnik
Tax Partner
EY

Indian real estate, a vital sector of the Indian economy that contributes significantly to the Indian GDP, has started to show some signs of recovery and optimism in the sector is slowly returning. Some of the issues faced by this sector include uncertain global headwinds, high inflation rates, subdued retail demand, high interest rates coupled with credit crunch, challenges associated with land acquisitions, stamp duty costs, non-standardized bye-laws and limited institutional exit options. In view of the credit squeeze applied to the sector and limited funding options, real estate developers have had to resort to disposing non-core assets and land sale to service debt etc rather than operational cash flows as projects have been on hold.

It needs to be borne in mind that this sector has extensive backward and forward linkages, both direct and indirect, with nearly 300 other sectors/ industries of the economy and that the housing segment ranks fourth in terms of the multiplier effect on the entire economy, with estimates pointing that for every rupee that is invested in housing and construction, nearly Rs 0.78 gets added to the GDP of India.

In view of recent investor friendly news emanating from North Block, the Union Budget 2013 has immense potential to improve the sector sentiment and at the same time re-stimulate its growth. It is hoped that this time around real estate players would not be left gasping for more.

Keeping the above in perspective , the Government should liberalize the FDI guidelines for inflow of foreign capital to real estate sector and further extend external commercial borrowings (ECBs) facility to all real estate projects alongwith the lower tax withholding rate announced last year (even for projects other than affordable housing) so as to permit domestic developers to access foreign competitively rated funds and tide over the current economic crisis. Also, the real estate sector hopes to receive industry status (with classification of affordable housing as a priority lending sector ) so that funds can be raised domestically too, with greater ease and at rates lower than those prevailing in the market today.

On the direct tax front, it is hoped that minimum alternate tax (MAT) on special economic zones (SEZs) would be removed. As India continues to be among the top countries in the world with highest housing and work space needs remaining unfulfilled, the requirement of completing housing projects by March 31, 2013 in order to avail 80IB(10) tax holiday benefit would be extended by a couple of years.

Developers also hope that their long-standing demand of granting infrastructure status to development of integrated townships is finally agreed upon by the Government as its development also entails development of various infrastructure facilities such as roads, water supply, sewerage system , sanitation, water treatment, electrification, landscaping, solid waste treatment and other civic services. Granting of infrastructure status would in-turn make these developers to be eligible to various fiscal incentives including tax holiday benefits under section 80IA.

Further, in order to incentivize real estate developers to undertake more affordable housing projects, deduction for capital expenditure under section 35AD should also include cost of land and building. The Government must also provide incentives to the public and private players to take up R&D activities for new building materials and technologies so that the industry can deliver low cost, affordable, and sustainable and environment friendly housing and building structures.

On the indirect tax front, rates of service tax, excise and custom duty, which were raised in the last budget, should be lowered for real estate development activities as the burden of such taxes are passed on to the ultimate customers in the form of higher prices. Further, in order to ease property prices in housing segment (including the affordable housing segment), Government should consider taking the housing segment (including affordable housing ) out of the ambit of service tax completely by bringing out a specific exemption notification.

From a home buyer perspective, limit for deduction in respect of interest on home loans should be enhanced from the present Rs 150,000 to at least Rs 300,000. Further, the principal repayments should be treated as a separate tax exemption and excluded from the purview of section 80C where deduction is capped at Rs 100,000. A further increase in tax exemption limits for individuals would also be a welcome move which would increase the purchasing power of buyers and may act as stimuli and possibly surge up the demand in real estate.