Budget PLUS 2013

Budget 2013- RE Impact

Budget PLUS 2013

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Budget PLUS 2013

Economic survey 2012–13: Highlights:

After the global economic slowdown, caused by the global financial crisis, the Indian economy responded strongly to fiscal and monetary stimulus and registered strong growth of 8.6% and 9.3% in FY10 and FY11, respectively. However the high inflation led the RBI to tighten the monetary policy, adversely impacting investments. Moreover, slowing global economy due to the Euro crisis and uncertainties about fiscal policy in the US, and a weak monsoon has impacted Indian economy adversely. As a result the Indian economy has witnessed a slowdown in the past two years, with GDP growth of 6.2% and 5.0% in FY12 and FY13, respectively. The moderation in growth has been due to weakness in industry which registered growth rate of only 3.1% in FY13 while growth in manufacturing sector dipped further to 1.9% in FY13. Services sector too slowed to 6.6% in FY13 from 8.2% in FY12.

The savings rate has declined to 30.38% in FY12 and investment rate has declined to 35.0% during the same period. Fiscal deficit as a percentage of GDP has increased from 4.8% in FY11 to 5.7% in FY12 and is estimated to be 5.1% in FY13 (which has been contained at 5.2%).

The Survey projects a growth rate of 6.1%-6.7% for FY14 as possible reduction in policy rates and easing of some of the regulatory and financial impediments to investment due to further moderation in inflation will encourage investment activity and facilitate growth. The survey has emphasized to restore domestic balance and fiscal consolidation. The following are some of the highlights related to the real estate industry in the survey: ► Real estate (including ownership of

dwellings and business services) sector’s share in GDP was 10.8% in FY12. The housing sector alone contributes approximately 5.9% of India’s GDP.

► The per capita net national income is expected to increase from INR61,564 in FY12 to INR68,747 in FY13, reflecting 11.7% growth.

► In order to encourage Foreign Direct Investment (FDI) inflow, FDI policies in India have been continuously liberalized. During April-November FY13, although

over all FDI inflows fell by 43.3% to US$15.85 billion compared to the same period in the previous year but net portfolio flows including foreign institutional investments (FII) increased by 77.6% (April-September 2012).

► In FY12, FDI inflows to the services sector (top five sectors including construction) grew significantly at 57.6 % to US$ 12.1 billion compared to the growth of overall FDI inflows at 33.6 %. However in FY13 (April-November), FDI inflows in the top five services also fell by 9.7% to US$8.19 billion.

► FDI inflows to the hotel and tourism sector increased by 328% in FY13 (April-November) over the corresponding period in the previous year.

Tourism:

► In India, the tourism sector has witnessed significant growth in recent years even though the world is witnessing slowdown and economic crisis continues in Europe. During the period 2008 to 2012, the CAGRs of foreign tourist arrivals (FTA) and foreign exchange earnings (FEE) from tourism were 5.9% and 10.7% respectively.

► FTAs during 2012 were 6.65 million reflecting a growth of 5.4% over 2011 and FEEs in 2012 were US$17.7 billion reflecting a growth of 6.8%. Domestic tourism provided resilience to the sector, with domestic tourist visits during 2011 being estimated at 851 million, with a growth of 15%.

► As per Tourism Satellite Account (TSA) data 2009-10 the contribution of tourism to India’s GDP was 6.8% and its contribution to total employment generation was 10.2%.

► To promote tourism, the Government has taken many policy initiatives including a five-year tax holiday for 2, 3, and 4 star category hotels located around UNESCO World Heritage sites (except Delhi and Mumbai) for hotels which start operating between 1 April 2008 and 31March 2013; an investment-linked deduction under Section 35 AD of the Income-tax Act, 1961 extended to new hotels of 2 star category and above anywhere in India, allowing 100% deduction in respect of the whole or any expenditure of capital nature

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excluding land, goodwill, and financial instruments incurred during the year; and inclusion of 3 star or higher category classified hotels located outside cities with population of more than 1 million in the harmonized list of the infrastructure subsector. To attract foreign tourists coming to India for medical treatment, a new ‘medical visa’ category has been introduced.

► The survey has highlighted various challenges which the sector is facing including multiple taxes on hospitality- and tourism-related activities and luxury tax which is imposed by state governments leading to high tariffs and low occupancy in hotels.

Real estate housing Index:

► The National Housing Bank (NHB) launched NHB RESIDEX, a representative housing price index (HPI) for select cities. Residex, launched in July 2007, covers 20 cities and has been released with a quarterly frequency from 2011-12, with 2007 as the base year. In the latest survey, RESIDEX has been updated and released for the quarter ended September 2012. The RESIDEX revealed that pace of change of prices of residential properties vary considerably across the cities, though, property prices have moderated in 2012-13. During the period 2007 to 2012, prices have increased in 9 cities while 3 cities have witnessed a decline.

► Maximum price rise was in Chennai (212%) followed by Bhopal (106%) and Pune (101%). Other cities which showed an increase in prices with respect to base year are Mumbai (98%), Kolkata (91%), Ahmedabad (80%), Delhi (79%), Lucknow (75%), and Patna (38%).

► However, during the same period, three cities have witnessed decline in prices with maximum decrease observed by Hyderabad (16%), followed by Jaipur (15%), Bengaluru (2%).

Special Economic Zones (SEZs):

► Since the notification of the SEZ Act in February 2006, 579 SEZs have been given formal approvals and 384 have been notified. Total number of operational SEZ in the country stands at 160 (3,308 units) of which 93 are IT/ITES, 17 multi-product and 50 other sector-specific SEZs. Total

employment through SEZ is provided to 945,990 people.

► Physical exports from the SEZs have increased from INR3,158 billion in 2010-11 to INR3,645 billion in 2011-12, registering a growth of 15.4%.

► The total physical exports from SEZs in the first half of 2012-13 was approximately INR2,396 billion, registering a growth of 36% over exports in the corresponding period of the previous year.

► The total investment in SEZs till 30 September 2012 was approximately INR2,187 billion, including INR2,147 billion in the newly notified zones.

Credit to real estate:

► Due to moderation in inflation rates, RBI has undertaken calibrated liquidity easing measures which has decreased the lending rates.

► The y-o-y growth of bank credit by scheduled commercial banks was 16.5% in Q3 2012-13 while it was 16.37% in the corresponding period of previous year.

► Monetary policy started becoming a little more accommodative in 2012-13 due to moderation in inflation rates. The policy rates were cut during 2012-13, including reduction of 75 basis points (bps) in the repo rate, a reduction of 100 bps in the SLR, and 75 bps cut in the cash reserve ratio (CRR). As a result, banks have been reducing their deposit and lending rates. The modal base rate of banks declined by 25 bps to 10.50 in 2012-13.

► Gross bank credit to services sector increased from INR9,395 billion in Q3 2011-12 to INR10,617 billion in Q3 2012-13.

► With support from lending institutions, housing credit has grown substantially over the years, resulting in increased market penetration. Total amount outstanding against housing loans by public sector banks was INR1,942 billion in March 2012, 3.1% increase y-o-y.

► The housing loan portfolio of scheduled commercial banks and housing finance companies – the major institutional players – stood at INR6.1 trillion as at the end of March 2012. However, due to limited housing finance solutions and

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underdeveloped mortgage market, the gap between housing demand and supply is widening.

Affordable housing:

► Government has taken several policy measures for affordable housing segment. Some of them are, allowing external commercial borrowings (ECB) for low cost affordable housing projects, increase in investment linked deduction of capital expenditure incurred in the affordable housing projects, exemption from service tax payments for construction services related to residential dwellings, and low cost mass housing up to an area of 60 sq. m under the Scheme of Affordable Housing in Partnership.

► Government also Permitted the National Housing Bank (NHB)/Housing Finance Companies to avail ECBs to finance prospective owners of low cost / affordable housing units

► A Credit Risk Guarantee Fund Trust, managed by the NHB, was established on 1 May 2012, and will provide default guarantee for housing loans up to INR500,000 sanctioned and disbursed by the lending institutions without any collateral security or third party guarantees and for new borrowers in the EWS/ LIG category in urban areas.

Union Budget 2013 Policy measures:

► Interest subvention scheme to be extended to FY 2013-14, under which 1% subvention is allowed on housing loans up to INR 1.5 million, provided the cost of house does not exceed INR 2.5 million.

► Urban Housing Fund to be established with an initial corpus of INR 20 billion to mitigate the huge housing shortage in urban areas.

► Fund allocation for Rural Housing Fund, which has been set up to refinance lending institutions (including Regional Rural Banks) has been increased from INR 40 billion to INR 60 billion.

► SEBI to simplify procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors.

► Pension Funds and Provident Funds permitted to invest in exchange traded funds, debt mutual funds and asset backed securities.

► Broad principle laid out to distinguish FDI from FII following international practice. Broadly, foreign investment to be treated as:

► FII, where a foreign investor has a stake of 10 percent or less in a company; and

► FDI, where a foreign investor has a stake of more than 10 percent in a company.

Direct tax proposals:

► No change in individual tax slabs except for a minor relief of INR 2000 in the INR 0.2 million to INR 0.5 million slab category. However, surcharge of 10% shall be levied on individuals having income exceeding INR 10 million.

► Surcharge on domestic and foreign companies where taxable income exceeds INR 10 million but is less than INR100 million stands unchanged at 5% and 2.5% respectively. However, where income of domestic and foreign companies exceeds INR 100 million, surcharge has been increased to 10% and 5% respectively.

► Increase in surcharge rates to increase the effective rate of Dividend Distribution Tax (DDT) on domestic companies from 16.2225% to 16.995% (inclusive of education cess and surcharge).

► Tax sops for affordable housing sector to continue.

► Rates of Securities transaction tax (STT) amended as follows:

► No STT payable by purchaser on purchase of units of equity oriented fund (delivery based);

► STT on sale of units of equity oriented funds (delivery based) reduced to 0.001%;

► STT on sale of futures securities reduced to 0.01%; and

► STT on sale of units of equity oriented fund to mutual fund reduced to 0.001%

► Tax at the rate of 1% required to be withheld by purchaser of an immovable property, other than agricultural land, while crediting or making payment to a resident seller, if the consideration for such immovable property exceeds INR 5

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million. This shall come into effect from June 01, 2013.

► Unlisted domestic companies to be subject to additional tax at the rate of 20% (plus education cess and surcharge) on the consideration paid for buy back of its shares as reduced by the amount received by such company of issue of such shares. This shall come into effect from June 01, 2013

► Where the domestic company is liable to pay such additional tax, income arising to its shareholders on such buy-back to be exempt from tax.

► Dividend to be received by domestic companies in FY 2013-14 from its foreign subsidiary companies (in which it has shareholding of 26% or more), continues to be taxable at a lower tax rate of 15%.

► Cascading effect removed in respect of such dividends received by a domestic company from its 51% or more equity owned foreign subsidiary. This shall come into effect from June 01, 2013.

► Transfer of land or building (or both), being stock-in-trade , to be taxed as business income adopting the consideration value to be higher of:

► Stamp duty valuation of such transferred land or building (or both); or

► Actual consideration accruing or received for such transfer

► Gift taxation widened for individual/ HUFs where immovable property received for a consideration which is less than the stamp duty value of such property by an amount of INR 0.05milion. In such cases, the difference between the stamp duty value and the consideration would e subject to tax.

► Modified provisions of General Anti Avoidance Rules (GAAR) to be introduced w.e.f. FY 2015-16, to levy tax on impermissible tax avoidance arrangements.

► Tax withholding rate for royalty and fees for technical services payable to non-resident increased from 10% to 25% (plus education cess and applicable surcharge). However, beneficial tax treaty rate shall continue to be available.

► It has been clarified that submission of Tax Residency Certificate (TRC) by a foreign company is necessary but not a sufficient condition for claiming tax treaty benefit.

► Additional interest deduction of INR 0.1 million to individuals from their taxable income on loans (sanctioned in FY 2013-14) up to INR 2.5 million for the purchase of their sole residential house property with a cost up to INR 4 million.

► Work on formulation of Direct Taxes Code (DTC) is still in progress. DTC to be a new code which shall replace the extant Income-tax Act, 1961 and has been promised to be based on the best international practices that will be compatible with the needs of a fast developing economy. The finance minister without confirming the roll-out date, mentioned that they shall try to table the DTC bill in the parliament before the end of the budget session.

► Definition of agricultural land which is to be considered as a ‘Capital Asset’ has been amended to include such agricultural land which is within the prescribed population size and specified distance range, measured aerially, from any municipality or cantonment boards.

Indirect tax proposals:

► Reduction in abatement rate from 75% to 70% available on pre-construction sale of residential units having carpet area of more than 2000 sq ft or priced at INR 10 million or above. Effective increase in Service tax rate from 3.09% to 3.71% which should lead to an increase in price of such units for ultimate buyer. Change effective from March 01, 2013.

► Increase in Excise duty rates on marble, marble slabs, tiles from INR 30 / sq mt to INR 60 per sq mt. May lead to a marginal increase in input costs for developers as no credit available. Change effective from March 01, 2013.

► Service tax exemption to general public parking has now been withdrawn. Should lead an increase in parking charges levied across. Change effective April 01, 2013.

► Penal provisions under service tax have been made more stringent, with certain offenses having been made cognizable.

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► Such provisions to come into force from the date on which the Finance Bill, 2013 receives the assent of the President.

► One time amnesty scheme introduced in Service tax with waiver of interest and penalty. Applicable for Service tax not paid and not disclosed in Service tax returns from October 01, 2007 to December 31, 2012.

► The scheme will be operational from the date on which the Finance Bill, 2013 receives the assent of the President.

► No change in general Excise, Customs and Service tax rate.

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