Image: Sanjay Borra
Real Estate sector, the second largest contributor to the economy (as per the data available on the website of the Ministry of External Affairs and sectorial report released by IBEF), in the recent past has been facing sluggish growth, cash trap and various other issues. The recent relaxations in the Foreign Direct Investments (FDI) norms were expected to attract better FDI inflows and provide boost to the sector in the long run. However, the recent step of demonetisation hugely impacted (atleast in the short run) the growth of the sector. This has shaken the industry’s sentiments, to some extent.
In long run, the passing of Real Estate Regulation and Development Act, 2016 (RERA), Benami Transactions Act and other changes should bring in the much needed transparency to the sector and only the players with integrity are expected to sail through. Correspondingly, access to funds should become cheaper. Further, reduction in interest rates consequent to demonetisation, is expected to boost the purchasing power of the home buyers and may provide some boost to the sector. Having said this, considering the kind of deterrents the sector is facing, it certainly needs some immediate impetus.
Against this backdrop, the Union Budget 2017-18 is looked upon by the industry for reforms in the tax arena in the form of tax incentives and rationalisation of certain provisions of the Income-tax Act (the Act), which could give the much needed impetus to the sector and help in reducing the demand-supply gap. Albeit, the list of expectations is always long, key expectations are listed below-
Provisions relating to Real Estate Developers
• The tax benefit provided under Section 80-IA and/ or Section 35AD of the Act to an undertaking which develops or develops, operates and maintains or maintains and operates an infrastructure facility should also be extended to integrated township projects by including the same within the definition of infrastructure facility. This is likely to motivate the real estate developers to develop and promote large integrated townships and also boost the development of infrastructure facilities such as roads, sanitation facilities, educational and medical facilities etc. related to integrated townships.
• Under a Joint Development Arrangement (JDA), significant uncertainty exists on the point of accrual of income in the hands of the land owner. There have been conflicting decisions of various courts on taxability of JDA arrangements in the hands of the land owner.
Suitable amendments should be brought in so as to provide that in a JDA wherein the land owner is to be given revenue or constructed area share, the same shall be taxed at the time such revenue accrues to the developer and payable to the land owner or the possession of constructed area is handed over to the land owner, as the case may be.
• Finance Act, 2016 inserted Section 80-IBA granting 100 percent exemption for affordable housing projects subject to conditions which inter alia include a condition that the project should be completed within 3 years from the date of approval. However, no exemption is provided for such projects under MAT. Suitable amendments should be made to provide exemptions under MAT for Affordable Housing Projects, otherwise the affordable housing project would continue to attract atleast 20% tax under MAT, which defeats the purpose of granting the tax incentive at first place. Further, considering the ground realities, the time limit for completion of the project should be extended to 5 years as compared to 3 years.
• The Finance Minister has been committed to the revival of SEZs and the infrastructure of the country. Towards this commitment, MAT exemption should be reinstated for the SEZ developers and SEZ units. It may boost the SEZ sector and result in revival of the same. Further, MAT exemption should also be granted to the Infrastructure Companies, which will also result in the growth of the economy with rapid investment in infrastructure development.
• The provisions of Section 43CA and Section 50C of the Act for deemed taxation based on stamp duty valuation should be removed and any suspected understatement of consideration should be tackled by investigation mechanism. Alternatively, Section 43CA and Section 50C should not be made applicable in certain situations such as distress sale arising on account of various situations once it is proved by the assessee before the tax authorities.
Provisions relating to REIT/InvIT
• Suitable modifications should be made to allow a lower threshold period of 12 months (as applicable to listed equity shares) for REIT/InvIT units to qualify as long term capital asset, in place of 36 months. The very idea of having compulsory listing of REIT/InvIT is to create liquidity and to encourage mobilizing small savings into the real estate/infrastructure sector. A larger holding periodicity to qualify as long-term capital asset can discourage investors thereby impacting the very success of REIT/InvIT.
• Suitable amendments should be introduced so as to exempt the transfer of asset being immovable property directly to the REIT /InvIT from tax, at the time of such exchange. Amendment should also be made to exempt the levy of MAT from transfer of properties to REIT/InvIT on initial transfer.
• Dividend distributed by an SPV to REIT is exempt from Dividend Distribution Tax (DDT). Similarly, interest payable by SPV (being a company) to REIT is exempt from tax. The SEBI has recently approved two layer SPV structure for REIT. Suitable amendments should be made to provide exemption from DDT on dividends to be distributed by an SPV to HoldCo and also to provide exemption to interest income earned by the HoldCo from the SPV to make REIT more effective.
Provisions relating to individuals
• The deduction for interest on housing loan should be enhanced to atleast INR 500,000 to encourage home-buyers to invest in real estate and increase the demand in the market.
• Further, the deduction under Section 80C of the Act for principal repayment of housing loan should be increased from the existing limit of INR 150,000 to INR 500,000.
• Alternatively, the deduction may be allowed for the entire purchase price (upto certain limit say INR 50 lakh) paid for first house to individual while computing income. Such deduction can be spread over a period of 5 years.
The above relaxations along with other favorable policy changes can help the currently ailing industry to perform better and continue to contribute to the Indian economy.- By Girish Vanvari – Partner and Head, Tax - KPMG in India. All views and opinions expressed herein are those of the author(s) and do not necessarily represent the views of KPMG in India.