Monday, July 6, 2009

Constructing the Way up - Budget 2009

Constructing the Way up - Budget 2009

By Nandita Tripathi, Associate Director, Tax, KPMG

The recent downturn has hit the realty sector the hardest. From a
stage where cash was chasing limited quality projects, the sector is
now facing a severe financial crunch. While the Government with a
clear mandate has provided the requisite stability to the economy, it
should now focus to retrieve the sluggish real estate sector, being a
key driver of the Indian economy.

Real estate in India is the second largest employer next only to
agriculture and its size is close to USD 12 billion, growing at 30%
per annum. Growth in the sector has a direct impact on its ancillary
industries of steel, cement, etc. In the backdrop of its importance
to the growth of the Indian economy, it is vital for the Government to
nudge growth in the sector to newer heights through fiscal stimulus
which would also help make affordable housing a reality and within the
reach of the proverbial "aam aadmi".

As a first step, the Government should accord "infrastructure status"
to the housing sector and appoint a regulator to act as a single
window for overseeing and monitoring the affordable housing agenda.
After being hit by the global financial meltdown, real estate
developers have now recognized the growing demand for affordable
housing. To provide further impetus to this direction of development,
the Government should consider reinstatement of the tax holiday
benefits under section 80IB-(10) for affordable housing projects.

Increase in the limit of interest on housing loan from the existing Rs
1.5 lacs to Rs 3 lacs and a corresponding increase in the tax
deduction limit for the principal loan amount would further go a long
way to enhance the common man's appetite for home loans by lowering
their tax outflows and hence, making their dream home a reality.

Large scale developments such as SEZs and Industrial Parks are the
answer to India's next round of industrial growth. The existing law
provides unequal tax structures for SEZs and Industrial Parks. Despite
the latter being granted "infrastructure status", restrictive and
stringent application of tax incentives coupled with delays in timely
clearance of applications has seen far and few takers for development
of Industrial parks. Tax incentives similar to SEZs should also be
granted to Industrial Parks. Given that such large developments are a
key factor to growth of India's industrial/ commercial sector, there
is definitely a case for extending the tax holiday benefits for
Industrial Parks which expired in March 2009, to March 2015 and
relaxing the tax holiday provisions.

In the current economic slowdown, Real Estate Mutual Funds (REMFs)
could provide the necessary financial support to the cash starved
housing sector. However, since its introduction a year back, REMFs
have not found any takers due to unclear regulations and absence of
guidelines for their tax treatment. Recognizing the need for REMFs as
an important capital contributor for the sector, the Government should
consider aligning the regulations to global best practices, including
providing a tax pass through status for registered REMFs.

Separately, outdated and draconian provisions such as section 50C
should be repealed as they result in an unfair basis for taxation. In
today's times, where real estate transactions are governed by market
dynamics, applying a notional basis for taxation causes undue hardship
to the taxpayer. Section 50C deems the transfer value adopted for
stamp duty purposes (ie the circle rate) as the consideration for
transfer of a capital asset being land or building, where such value
is higher than the actual sales consideration. The irony is that these
values fixed more than 5 years back have not been brought down even
when prices in the real estate market have fallen.

On the indirect tax front, in light of recent clarification issued by
tax authorities, credit of service tax paid on construction activities
is not available as the output in such case is an immovable property,
which is neither 'service' nor 'goods'. This clearly results in input
cost burden on developers due to denial of credit of service tax paid
on construction activities against output service tax liability. The
aforesaid clarification is against the scheme of the CENVAT credit law
as the definition of 'input service' specifically includes services in
relation to setting up, modernization, renovation etc. Accordingly, in
order to reduce costs, it should be clarified that credit of service
tax paid on construction services would be admissible against output
service tax liability of the developer.

In the backdrop of the wish-list provided above, it would be a tough
balancing act for the Finance Minister but given his background as a
seasoned politician and his experience in the North Block, the real
estate industry is looking forward to his guidance in the forthcoming
budget to steer clear of the current crisis.
**

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