Jayesh Kariya and Bhairav Dalal, Chartered Accountants
Ever since the Real Estate sector opened up to Foreign Direct
Investment in March 2005, the sector has seen unprecedented, to an
extent, uncontrolled, growth. The sector has grown by 30% to 35% in
the past five years. In terms of product mix, residential contributed
to 80% of the real estate and the remaining 20% is for commercial
property which included offices, shopping malls, hotels, hospitals,
multiplexes and entertainment centers. The glory did not continue
longer and witnessed the shadow of "dark clouds"..
The global slowdown, high interest rates and low confidence in the
economic outlook have impacted the realty sector hard in the latter
half of 2008 and early 2009. The control measures that RBI had
undertaken to control the growth have resulted in cash crunch
situation and an exponential increase in the cost of financing. The
end user has to bear such increased finance cost in the form of
increased rates. The home loan interest rates have increased
proportionately, putting the customer into a Catch 22 situation. The
commercial property segment is affected by high capital cost and
reduction in rental values while the residential sector on the other
hand felt a big dent as the supply has outpaced the demand. Though,
despite the positive sentiments displayed by the Indian economy very
recently, this sector is still grappling with the challenges posed by
multi- pronged pressures.
The stimulus package provided by the Government in the form of
'Affordable Housing' and the slashing of the mortgage rates by the
banks is expected to provide an impetus for the property market from
the downward trend it has experienced, at least in the low to mid end
housing segment. This could help the Indian economy recover,
supported by a large, young workforce; gradual but consistent
liberalization reforms and a high rate of consumer and private-sector
savings. The growing population and economic expansion will mean that
India needs not just homes but offices, schools, hospitals, and
entertainment centers. Addressing infrastructure needs will be an
important priority to support this property development.
But it's not enough to just provide for the stimulus packages. To
generate interests from the developers and promoters, it is important
that the Government announces certain additional measures like tax
incentives and exemptions to the developers, which can be passed on to
the consumer in the form of lower property prices. Stamp duty is
another high cost for property transactions along with the fact that
the same varies across the states. Currently, it is being charged on
both, the land and the apartment. It is imperative that Stamp duty and
registration charges be rationalized for this sector to sail through
this turbulent phase.
Some of the policy measures mentioned below will boost the growth of the sector:
* Accord infrastructure industry status to the Housing Sector as
it is the second largest employer next only to agriculture and it will
help the cash starved sector in the form of bank funding;
* Provide clarity on regulations and guidelines for Real Estate
Mutual Funds (REMFs) as it provide alternate investment avenues to the
investors as well as developers to augment their fund requirement;
* Opening up of ECB regime for the real estate sector especially
for mass economy housing and mega projects
Additionally, some of the tax incentives discussed below could create
positive impact on the sector:
* Increase in limit for deduction for interest paid by end user on
home loans from Rs. 1.5 lacs to Rs. 3.00 lacs. This could encourage
people to explore the opportunity of going for their 'Dream Home'
* Tax exemptions for mass and economy housing projects similar to
section 80IB(10)
* Clarity on the taxability of the lease rentals on the commercial
property. Currently there seems to be different views in the market
and the litigation around this with the tax department is just
increasing the need to clarity.
* Tax Depreciation is not allowed as a deduction when the rental
income is taxed as house property income. Allowability of
depreciation against income from house property should be considered
to provide some boost to the weakening commercial property sector.
* Industrial Parks is an area which promises the growth of the
Indian Economy. Tax holidays for units in Industrial Parks should be
brought at par with Special Economic Zones;
* Repeal the impracticable and draconian provision of section 50C
requiring imputation of notional stamp duty value for the purpose of
taxation in today's decayed market;
* Rationalization of stamp duty and registration charges
*
On indirect taxes, the industry would hope that the current reduction
in excise duty rates are maintained, as any increase in indirect tax
rates transpires into increased cost of construction, adding burden on
the otherwise sluggish demand. The concern on the change in indirect
tax rates stems also from the apprehension that the finance minister
may, in order to move towards the proposed onset of GST, consider
revisiting indirect tax rates.
Talking about GST, the infrastructure industry would also be eager to
understand as to whether the concessions or benefits that are
currently available to infrastructure projects would continue under
the GST regime, or whether the same would be discontinued. One view in
the matter could be that given the basic premise of the GST being
implemented with no exemptions/ concessions, the same premise should
be extended to infrastructure projects also. However, another view
could be that given the need for development of infrastructure in the
country, the infrastructure projects should be accorded a special
status under the GST regime with earmarked benefits/ concession/
exemptions. Of course, the matter requires deliberation not only from
a fiscal perspective, but also from an overall socio political
perspective. Whatever be the outcome, which the industry would
definitely be waiting with bated breath, it would at least be hoping
that the benefits which are currently available, are given in a manner
such that they do not discriminate between the various infrastructure
projects. A case in point could be while construction of ports and
airports currently enjoy service tax exemption, no exemption is
available on construction of power plants, which is as much an
important clog to the wheel of infrastructure. Similarly, while
development and construction of infrastructure projects enjoy the
service tax exemption, services relating to maintenance of same
projects attract service tax. And then there are issues in
interpretation on the scope of existing exemptions, for e.g. would a
metro project be regarded as "railways" for the purpose of service tax
law and hence should enjoy the benefit of service tax exemption that
is currently available to railways?
Policy changes and tax incentives mentioned above will provide timely
help for the sector and will certainly help in re-building the
confidence of the players in the sector.
**
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