The real estate sector has contributed only 5% of India's overall GDP this year as compared to a contribution of 10.6% in FY 2010-11. With the lack of cheap credit and increased debt servicing levels and with the declining rate of foreign direct investment in the real estate sector, the Union Budget 2012 was the only aspiring ray of hope for the sector to get back on track.
Between government stimulant on the much needed funding front and certain direct tax sops on the one hand, to higher tax compliances and higher indirect taxes on the other, it seems that the finance minister has tried to achieve a balance with this year's budget proposals.
Some of the key highlights are:
· External Commercial Borrowing (‘ECB') doors are proposed to be made open for specified low cost affordable housing projects which could potentially provide the much needed liquidity to the housing sector.
Further, the interest to be paid on the ECB loan availed from the period July 2012 to June 2015 by the real estate developer is proposed to be subjected to a lower rate of deduction of tax at source of 5% from the existing rate of 20%
· Investment linked deduction available for low cost affordable housing projects increased from 100% to 150%. This amendment may provide a much needed fillip to the affordable housing segment by way of getting a higher rate of deduction on capital expenditure though cost of land (which constitutes majority portion of cost) is excluded.
· Venture Capital Funds (‘VCF') focussed on real estate sector can now breathe a sigh of relief with the reinforcement of tax pass through status for all types of VCFs. By virtue of this amendment, the VCF making investment in a real estate SPV will not be subject to tax and the tax will be levied at the investor level.
This amendment does away with the age old controversy surrounding taxation of trusts and will result in reduction of litigation.
· One of the major proposal which may have a huge impact to the real estate sector relates to the requirement of deduction of tax at source @ 1% on payment of consideration for purchase of an immovable property having value in excess of Rs. 25 lakhs (Rs. 50 lakhs for immovable property situated in specified urban areas).
This proposal may have an immediate cash flow impact for the real estate developers selling their projects to innumerable buyers. Also, this proposal may result in increasing the compliances for the buyers in case the payments for the property are proposed to be made in various instalments.
· Increase in Service Tax rate from 10% to 12% coupled with increase in the excise duty rate for inputs and materials used in the real estate sector may lead to an increase in the property prices for the ultimate buyers. This may increase non-affordability of properties in a market where pricing concerns have been prevailing since a while.
While the industry players were hoping for a strong regulatory and effective policy framework which would have helped in boosting the real estate sector, the Union Budget 2012 falls short of expectations.
Hopefully, with increase in liquidity through availability of ECBs and availability of higher deduction for affordable housing, the real estate sector may get some respite from an otherwise stagnant growth pattern.
(Anish Sanghvi is an Associate Director, Tax and Regulatory Services practice of PwC India. Anish specializes in M&A Tax and inbound advisory with a focus on the real estate, infrastructure, and private equity line of business.
(Vishal S Shah is a Manager, Tax and Regulatory Services practice of PwC India. Vishal speacialises in inbound advisory and structuring with a focus on private equity, real estate and asset management industry)
(The views expressed in this column are the authors' own and do not represent those of Reuters)