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Top 10 Expectations Of Real Estate Sector From Union Budget 2017-18

Transactions of land or development rights therein should be excluded from the gamut of GST

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The real estate sector in India exhibited mixed trends during the year gone by, wherein commercial office sector witnessed an all-time high (43 million square feet) leasing of Grade A office space. On the contrary, residential segment continued to remain in troubled waters with 9 per cent decline in residential sales on year-on-year (y-o-y) basis. The demonetisation drive is believed to have impacted (in short to medium-term) the revival in the residential segment which was seen in the first three quarters of 2016. This resulted in 2016 recording the lowest residential sales of about 244,700 units post 2009.

The sector is grappling with number of issues which are restricting the growth. Some of the major ones include: prolonged demand slowdown in residential segment, liquidity crunch, limited options available with developers for long-term funding, and complex tax structures.

Though, we acknowledge and welcome the steps undertaken by the union government on the reforms front so far, the real estate sector is in dire need of an impetus which is expected through the Union Budget 2017-18. We have broadly identified ten key expectations from policy makers, which are enlisted below:

1. Make Real Estate Investment Trusts (REITs) structure an attractive proposition.

Suitable amendments should be brought to exempt capital gains, if any, arising on the transfer of immovable property by the owner thereof to REIT. Further, capital gains earned by REIT from sale of property or shares of REIT SPV, should also be exempted from taxation in the hands of REIT. Also, the threshold period of 36 months for REIT units to qualify as long-term capital asset should be reduced to 12 months.

Likely impact
This step is likely to make REITs an attractive proposition for both the developers and REIT unit holders. India has over 325 million square feet (msf) of ready REIT-able commercial stock (office and retail) across top seven cities, which is estimated to be valued at about Rs 3,700-4,050 billion (bn)/USD55-60 bn. Having the lower threshold for long-term capital asset will augur liquidity and encourage investors thereby make REIT structure successful.

2. Include and reconsider certain provisions under model Goods and Services Tax (GST) law

Transactions of land or development rights therein should be excluded from the gamut of GST. Also, there has to be clarity on whether credit would be available to either the contractor or the developer engaged in construction of immovable properties.
Further, the rate of GST for the under-construction property must be 12 per cent (with CENVAT credit) and 5 per cent for the under-construction Affordable Housing projects.

Likely impact
The proposed measures are likely to reduce the overall cost of the projects, thereby increasing the affordability of home buyers.

3. Create an ecosystem for tradable tax credits

Create a policy framework to allow state housing authorities to distribute tax credits to developers for affordable housing projects. These credits can then be purchased by investors at market determined prices.

Likely impact
The sale of tax credits can generate capital for such developers. The Low Income Housing Tax Credit program in the US, is the largest source of financing for developers having affordable rental-housing projects. These credits have financed over 2.9 million affordable rental-housing units in the US since such credits were launched in 1986.

4. Clarity on taxation of Joint Development Arrangements (JDAs)

Uncertainty in tax position and also multiple levy of taxes involving JDAs ultimately inflate the price of the residential unit for the home buyer. It is therefore recommended that appropriate guidelines be issued on the tax treatment of JDAs.

Likely impact
Land acquisition cost accounts for one of the major components of the overall project cost, which varies from 30-60 per cent depending on the project’s location. This move is expected to boost JDA models which may lead to leaner balance sheets of the developers.

5. Consider removal of Minimum Alternate Tax(MAT) on Special Economic Zone (SEZ) units and developers and also on affordable housing projects

The levy of MAT has drastically reduced the development of SEZs over the past few years, resulting in a significant impact on overall economic development. Hence, the government should consider scrapping MAT currently being levied on SEZ units and developers, to again revive the interest of developers in developing SEZs. Further, MAT exemption should also be granted to the affordable housing projects.

Likely impact
This may help the government in providing impetus to the mega initiatives, such as ‘Make in India’, ‘Housing for all by 2022’ and also make exports competitive.

6. Removal of Section 43CA and Section 50C of the Income-tax Act

The provisions of Section 43CA and Section 50C of the Income-tax Act for deemed taxation based on stamp duty valuation for business assets should be done away with and any suspected understatement of consideration should be tackled by investigation mechanism.

Alternatively, Section 43CA and Section 50C of the Income-tax Act should not be made applicable in certain situations such as distress sale arising on sale by bank to recover its dues or for any other reason as is proved by the assessee before the tax authorities.

Likely impact
Any suspected understatement of consideration can be tackled by investigation mechanism and not by such an amendment.

7. Grant infrastructure status to the real estate sector

The government should consider the demand of granting infrastructure status to the housing sector u/s 80-IA or u/s 35AD of the Income-tax Act, especially to integrated township projects.

Likely impact
Granting an infrastructure status may help reduce the risk-weightage assigned to the sector by RBI. It is expected to enable the developers to raise funds at comparatively cheaper cost and improve liquidity. This can revive the projects which are stalled due to liquidity crunch.

8. Allow developers to raise funds through External Commercial Borrowings (ECB) route

The government should allow real estate developers, to raise funds through ECB route for both affordable housing segments and other segments as well.

Likely impact
This can reduce the borrowing cost of developers significantly compared to borrowing domestically. This would in turn lower the project cost which can ultimately make the housing units affordable.

9. Restructure existing project loans with a moratorium of 3 years on the principal repayment.

The real estate sector has been grappling with liquidity issues and piling debt levels. The total outstanding debt of listed real estate developers in India has risen from Rs 25,000 crore ($3.7 bn) in fiscal year FY07 to over Rs 83,000 crore ($12 bn) in FY164. As a result, higher tax outgo and dwindling residential sales have further worsened the liquidity situation. Hence, it has become essential to bailout the sector by restructuring existing project loans.

Likely impact

This move is expected to improve liquidity situation which can enable completion of the projects which are stuck due to liquidity crunch.

10. Provisions in relation to Individuals

Increase the deduction limit u/s 80C of the Income-tax Act
The government must consider raising the deduction limit from Rs1.5 lakh toRs 5 lakhs u/s 80C of the Income-tax Act, from annual income on consolidated payments or deposits specified in sub-section (2). Alternatively, deduction may be allowed in relation to principal repayment up to INR10 lakh (spread over a period of 5 years)

Increase the deduction limit on interest on home loans u/s 24 (b)
It is suggested that the deduction on account of interest payment available u/s 24 of the Income-tax Act be made applicable from the year in which the loan was taken, as for the principal u/s 80C of the Income-tax Act, primarily to the first time home buyer.

Furthermore, since majority of the housing units in metros and tier-I cities cost over Rs 50 lakh, the government should look at raising the limit for deduction on interest payments from current Rs  lakh, for owner occupied houses.

Likely impact
As sub section (2) of Section 24 caters to payments on account of various necessary savings such as pension fund, provident fund, insurance etc., hence, raising the deduction limit would allow a home buyer to accommodate payments of principal amount borrowed for purchase or construction of a house. The move is expected to boost the housing demand, owing to an expected improvement in affordability.

With proper and faster implementation of these recommendations, we believe that the sector has the potential to again grow at a much higher pace. Also, meeting these expectations can help the government progress towards achieving the vision of ‘Housing for All by 2022’.

(All views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India)

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Union Budget 2017-18 taxes real estate capital gains tax

Neeraj Bansal

The author is Head of Real Estate and Construction sector, KPMG in India

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