Union Budget Impact on the Real Estate and Infrastructure (REI) sector

Transcription

1 Union Budget Impact on the Real Estate and Infrastructure (REI) sector March 2013

2 Contents 03 An overview 05 Key expectations 06 Key policy initiatives 07 Direct tax proposals 10 Indirect tax proposals 13 Our offices

3 Union Budget Impact on the REI sector 3 An overview An overview Real Estate in India is the biggest example of a sector that has transformed from being unorganised to a dynamic and organised sector over the past decade. Government policies have been instrumental in providing support after recognising the need for infrastructure development in order to ensure better standard of living for its citizens. In addition to this, adequate infrastructure forms a prerequisite for sustaining the long-term growth momentum of the economy. As per industry reports, the total economic value of the real estate activity in the country ranges between US$40-45 billion, which contributes 5-6% to the GDP growth. In terms of its infrastructure, India boasts 187 minor ports and 13 major ports and the second largest road network worldwide with a total length of 4.1 million kilometres. In addition, the country also has the fourth largest rail network in the world with a total length exceeding 64, 000 kilometres, fifth largest electricity generation capacity in the world as well as 454 airports and airstrips. Growth drivers Indian real estate sector still occupies one of the topmost positions among all the major sectors in terms of the investment viability and multiplier effect on the economy. Government of India is confident to enhance the total outlay across the infrastructure sectors such as roads, ports, railways and airports during the 12th Five Year Plan ( ) largely via Public Private Partnerships (PPPs). Some of the major growth drivers for the Real Estate and Infrastructure (REI) sector include: rapid urbanisation population growth and positive demographics rising income levels growth of the services sector increased foreign investments growth of the Indian middle-class increasing demand from Non Resident Indians (NRIs) influx of multinational companies growth in organised retail and entry of international retailers strong growth in India s tourism sector

4 Union Budget Impact on the REI sector 4 An overview Challenges The sluggish growth of the Indian economy, rising input costs and an overall slowdown in the global economy has resulted in a deceleration in the growth momentum of the real estate and infrastructure sector of the country in recent times. The sector that once grew at 7.8% in witnessed a slump during to 6.5% (till June 2012). Besides, these factors have also led to a marked deceleration in the cumulative growth rate of infrastructure showing the initial signs of slowdown in the Indian economy. Budget impact With a view to promote growth in the infrastructure sector, the government projects an investment of Rs 55,00,000 Crores on infrastructure in the 12th 5 Year Plan. The plan envisages a PPP model in addition to new and innovative instruments to mobilise funding in the infrastructure sector. There have been other policy initiatives for funding of the infrastructure projects, however, it will have to be seen whether they are enough to meet the enormous needs. Affordable housing had received supply side incentive in recent years by way of incentivised funding, investment based weighted deductions. This may not have been enough to make affordable housing available, which is why now some demand side incentives have been introduced such as setting up of urban housing fund and enhanced deduction on borrowings for houses costing upto Rs 40 Lakhs. High end housing will feel the stress of lesser abatement in service tax and also the introduction of TDS on transactions of immovable properties in excess of Rs 50 Lakhs. The budget is a mixed bag for the REI sector and some of the demands which have been languishing for long have still not been accommodated.

5 Union Budget Impact on the REI sector 5 Key expectations Infrastructure In order to have accelerated growth the infrastructure sector was expecting major policy decisions some of which are summed up as follows: removal of MAT on infrastructure companies which are enjoying tax holiday single window clearance for the infrastructure projects which will remove the bottlenecks and help in timely completion of the projects higher budgetary allocation in key infrastructure sectors like irrigation, roads, power, ports, water supply etc. stimulus to be provided for development of infrastructure in non-metro cities Real estate Real estate sector, on the other hand, was expecting quite a few budgetary provisions to help them tide over problems such as high interest costs and availability of finance. The expectations included the following: introduction of Real Estate Investment Trust (REIT) regulations additional deduction to home buyers on principal repayment and interest of housing loan fiscal policies to reduce borrowing costs integrated township projects / special residential zones to be covered under the definition of infrastructure for availing tax holiday moderation of service tax levy on real estate projects exemption to consortium/ association of persons (AOP) from domestic reverse charge of service tax

6 Union Budget Impact on the REI sector 6 Key policy initiatives Infrastructure encouraging Infrastructure Debt Funds to raise resources. India Infrastructure Finance Corporation Limited in partnership with Asian Development Bank to offer credit enhancement to infrastructure companies to enable them to access the bond market in the year , tax free infrastructure bonds to the extent of Rs 50,000 Crores may be issued by various institution assistance to be sought from Asian Development Bank and World Bank for building roads in north-eastern states and connecting them to with Myanmar. corpus of Rural Infrastructure Development Fund has been raised to Rs 20,000 Crores for the year Rs 5,000 Crores to be made available for construction of warehouses, godowns, silos and cold storage units a regulatory authority is proposed to be constituted for road sector to overcome the bottlenecks. Road projects of 3,000 Kms to be awarded in the first half of allocation of Rs 14,873 Crores to JNNURM towards public road transport. The major portion of the funds will be utilised to support purchase of upto 10,000 buses, especially by the hill States Real Estate An Urban Housing Fund in line with Rural Housing Fund is proposed to be set. The objective of this fund is to alleviate the huge shortage of housing in certain urban areas. The Finance Minister has proposed allocation of Rs 2,000 Crore for this purpose. The framework of the scheme is awaited, however, it is likely that it would be in lines of the Rural Housing Fund, and would have the objective of lending for urban housing undertaken by weaker sections.

7 Union Budget Impact on the REI sector 7 Direct tax proposals Transfer of immovable properties being stock in trade consideration for determination of business profit on the sale of land and/or building held as stock in trade would be higher of stamp duty value or actual transaction price. Similar provisions exists for land and/or building held as capital asset for determination of capital gains where the date of agreement to transfer and the date of registration of the transfer is not same, the stamp duty value as on the date of agreement would be considered this would have a significant impact on real estate companies which have traditional land banks acquired at much lesser values in a land owning company, as the actual development activity happens in the flagship company by acquiring the land or its development right from the land owning company Additional deduction of interest on housing loan an additional deduction up to Rs 1 Lakh of interest on housing loan taken from financial institution is proposed to be allowed to an individual the deduction would be available subject to the following conditions: - the amount of loan does not exceed Rs 25 lakhs - the value of residential property should not exceed Rs 40 lakhs - the assesse does not hold any other residential property on the date of sanction of loan - loan should have been taken within the FY the quantum of deduction shall be allowed to be carry forwarded to FY if not fully utilised in the FY no deduction of the said sum would be allowed under any other provisions of the Income Tax Act, 1961 (IT Act)

8 Union Budget Impact on the REI sector 8 Direct tax proposals Transfer of immovable properties under Tax Deducted at Source (TDS) net under TDS mechanism, a new section 194-IA is proposed to be inserted with effect from 1 June 2013 to recover tax by way of TDS where transfer of immovable property not being an agricultural land takes place. tax would be 1% on the total sum paid as consideration TDS would get triggered where the consideration exceeds Rs 50 Lakhs a similar provision was introduced in last year's budget, but did not find place in the enactment this would entail compliance burden in the hands of the buyer and procedural simplifications are warranted it is not clear whether this provision will be applicable in situations such as: when the immovable property is part of an undertaking which is transferred under slump sale or demerger when the buyer avails an housing loan and the consideration is paid directly by the lender typically on the day the property is registered in the name of the buyer Change in the definition of agriculture land the proposed amendment in the definition of capital asset brings clarification to agriculture land, which is presently dependent upon Government notification with respect to distance from the local limits of each municipality or similar authority as per the proposed amendment, in following situations the agriculture land will be considered as a capital asset: Distance from municipality limit Population of the municipality Within 2 kms more than 10,000 but does not exceed 100,000 Within 6 kms more than 100,000 but does not exceed 10,00,000 Within 8 kms.exceeding 10,00,000 Capital asset Yes Yes Yes

9 Union Budget Impact on the REI sector 9 Direct tax proposals Withholding of taxes on interest paid to nonresident Section 194LC of the IT Act is proposed to be amended so as to provide concessional withholding tax rate of 5% in respect of the interest income arising on subscription by non-residents in long term infrastructure bonds issued by an Indian company ( i.e. rupee denominated bonds). The withholding tax rate of 5% would be applicable provided non-resident deposits foreign currency in a designated bank account and such money as converted in rupees is utilised for subscription to a long-term infrastructure bond issue of an Indian company. This amendment will take effect from 1 June 2013

10 Union Budget Impact on the REI sector 10 Indirect tax proposals Service tax standard rate of service tax is retained at 12%. Abatement in case of construction for residential units having carpet area upto 2000 sq. ft. or where amount charged is less than 1 Crore (including amount of land), abatement remains at 75%. Therefore the taxable value would be 25% in all other cases, abatement is reduced to 70% (accordingly taxable value is increased from 25% to 30%)

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