Given the potential of the real estate sector in the economy and the industry witnessing a prolonged slowdown in spite of its significant economic contribution to growth, the sector has been looking forward to positive announcements in the Budget, both at industry level and for ultimate consumers.
From a perspective of the real estate sector, the Union Budget for 2017-18 has given the sector its fair share of attention, and a number of amendments/introductions would impact the sector and ultimate consumers. While it brings in certain amendments to boost the sector, some long-pending tasks seem to be unresolved.
The sector had been pushing for grant of infrastructure status as this would help in raising funds at a reasonable cost. This has been partially addressed by granting infrastructure status to affordable housing. Further, certain relaxations have been proposed in provisions for tax incentives to affordable housing projects.
To incentivize investment in immovable property and encourage transactions through banking channels, the period of holding of immovable property to qualify as long-term capital asset (and be subject to lower tax rate) has been reduced from 3 years to 2 years. However, a restriction has been introduced to limit set-off of loss from house property to Rs 2 lakh.
From investors' perspective, the period of availability of concessional rate of tax of 5 per cent on interest paid on bonds has been extended to June 2020 and the same rate of tax has been provided for interest on rupee-denominated bonds. It has also been clarified that foreign portfolio investors (Category I and Category II) would not be subject to indirect transfer provisions.
In line with BEPS Action Item 4, interest deductibility has been limited where interest is paid to an associated enterprise being a non-resident. The method of calculation has been linked to 30 per cent of the EBITDA of the Indian company rather than a linkage to capitalisation amounts.
Taxation of JDAs (joint development agreements) has been a vexed issue and has been consuming the time of courts in India. The litigation has been around the 'point of time' for taxation of land owners as well as method of computation of capital gains tax for land owners. The Budget 2017-18 seeks to provide clarity on this issue by clarifying that capital gains for land owners would be taxable in the year of completion of project. However, such clarity is only provided where land is owned by individuals or HUFs (Hindu undivided families). The ambiguity continues to remain for JDAs entered by land owning companies though this should provide some persuasive value in those cases also.
Taxation of notional income on unsold inventory of developers is an ambiguous and litigative issue. While developers are unable to sell their completed stock, they are also subject to tax on notional house property income on such unsold stock. The Budget proposes to introduce a provision where such taxation would occur only where the inventory is held for a period of more than 1 year from the end of the year in which completion certificate has been granted. This could open a potential pandora's box for developers with tax authorities trying to reopen past cases.
From an individual's perspective, one of the asks was to introduce exemption from Section 194IA, which requires buyers to withhold 1 per cent taxes on purchase of property leading to practical difficulties and undue hardships as the provisions are onerous and ambiguous. The Budget seeks to widen compliances required to be undertaken, as individuals and HUFs paying rent exceeding Rs 50,000 would be required to withhold taxes at 5 per cent.
Some of the expectations that continue to remain unaddressed include:
a) Clarity required on GST (Goods and Services Tax) front in relation to tax rates which may be applied on real estate projects
b) Amendments required in the tax regime for Real Estate Investment Trusts (REITs) so as to bring them in line with the global tax regime and make REITs an attractive investment vehicle
c) Way forward towards introduction of rules for implementation of Real Estate Regulatory Bill and request for introduction of single window clearance system to accelerate development
On an overall basis, the Budget 2017-18 was aimed at stimulating growth, bringing in anti-abuse measures in-line with global tax policies and improving ease of doing business. The honourable finance minister has presented a good Budget in volatile times and has assured that the government recognises the significance of the sector's contribution to the economy.
(Madhav Poddar is tax partner at EY)
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