Budget 2017 - Real estate and infrastructure
Tax Partner, EY India
The Finance Minister (‘FM’), who was entrusted with presenting India’s maiden combined Budget, seems to have met expectations for the infrastructure and especially the real estate sector. There are ambitious announcements for the infrastructure sector which will require continued government intervention and support to be successfully met.
The Budget presented by the FM aims at synergising investments in railways, roads, waterways and civil aviation. The FM has set a target of commissioning 3,500 kms of railway lines in FY 2017-18. The FM has also announced the proposed enactment of a Metro Rail Act to facilitate private participation and investment in construction and operation of metro railways. Roads continues to be priority with additional 2,000 kms of coastal connectivity roads identified for construction. A specific programme for multi modal logistics parks and multi modal transport facilities is proposed to be implemented. Select airports in Tier 2 cities under the PPP mode for operation and maintenance are to be taken up. In the energy sector, the second phase of solar park development for additional 20,000 MW capacity is also being commenced.
For the real estate (RE) sector, the budget proposals seem to have exceeded the industry expectations in many respects. The FM has accorded the infrastructure status to affordable housing which has been a long standing demand of the industry. This should result in cost effective funding becoming available to such projects. There are also several income tax proposals which would benefit the RE sector at large.
The existing profit-linked income-tax exemption scheme for developers of affordable housing projects has been liberalised by substituting the carpet area in place of built up area for determining the maximum area for eligibility and extending the time frame available for completion of projects from 3 years to 5 years. With a view to incentivising investment in RE sector and encouraging mobility of assets, the FM has proposed to reduce the holding period of immovable property from 3 years to 2 years for the gains to be considered long term in nature.
Another significant step by the FM is bringing clarity on taxation for the land owners in the case of joint development agreements. Capital gains would now be taxable only at the time of receipt of the completion certificate instead of at the time of signing the agreement.
The concessional withholding tax of 5% on interest income (earned over the life of the debt / borrowing) has now been extended for external commercial borrowings taken / infrastructure bond / masala bonds issued till 30 June 2020. The Finance Minister has also proposed to extend the concessional withholding tax rate of 5% on interest income earned till 30 June 2020 by foreign portfolio investors. These proposals would result in cheaper financing becoming available especially to the infrastructure sector.
There are new tax proposals governing the debt and equity mix of a company, commonly known as thin capitalisation norms. The allowability of interest expense claimed as deduction by an entity (other than banks and insurance companies) and paid to its associated enterprise shall be restricted to a maximum of 30% of its earnings before interest, taxes and depreciation. This could potentially increase the tax costs based on specific facts.
The Government’s thrust on introduction of GST could be as the Government has not attempted to do any significant changes in the current indirect taxes. This seems to be logical, with the GST implementation being closer.
While the proposals provide positive sentiments, it will be critical for the government to follow through to ensure that the infrastructure and the real estate sectors, which provide multiplier effects to the GDP, start pulling their weight.