Union Budget 2013-14 - Grant Thornton...

Union Budget 2013-14 Impact on the Real Estate and Infrastructure (REI)

sector

March 2013

Union Budget 2013-14 | Impact on the REI sector 3

An overview

An overview

Real Estate in India is the biggest example of a sector that has

transformed from being unorganised to a dynamic and

organised sector over the past decade. Government policies

have been instrumental in providing support after recognising

the need for infrastructure development in order to ensure

better standard of living for its citizens. In addition to this,

adequate infrastructure forms a prerequisite for sustaining the

long-term growth momentum of the economy. As per

industry reports, the total economic value of the real estate

activity in the country ranges between US$40-45 billion, which

contributes 5-6% to the GDP growth.

In terms of its infrastructure, India boasts 187 minor ports and

13 major ports and the second largest road network worldwide

with a total length of 4.1 million kilometres. In addition, the

country also has the fourth largest rail network in the world

with a total length exceeding 64, 000 kilometres, fifth largest

electricity generation capacity in the world as well as 454

airports and airstrips.

Growth drivers

Indian real estate sector still occupies one of the topmost

positions among all the major sectors in terms of the

investment viability and multiplier effect on the economy.

Government of India is confident to enhance the total outlay

across the infrastructure sectors such as roads, ports, railways

and airports during the 12th Five Year Plan (2012-17) largely

via Public Private Partnerships (PPPs).

Some of the major growth drivers for the Real Estate and

Infrastructure (REI) sector include:

• rapid urbanisation

• population growth and positive demographics

• rising income levels

• growth of the services sector

• increased foreign investments

• growth of the Indian middle-class

• increasing demand from Non Resident Indians (NRIs)

• influx of multinational companies

• growth in organised retail and entry of international retailers

• strong growth in India‟s tourism sector


An overview

Challenges

The sluggish growth of the Indian economy, rising input costs

and an overall slowdown in the global economy has resulted in

a deceleration in the growth momentum of the real estate and

infrastructure sector of the country in recent times. The sector

that once grew at 7.8% in 2009-10 witnessed a slump during

2012-13 to 6.5% (till June 2012).

Besides, these factors have also led to a marked deceleration in

the cumulative growth rate of infrastructure showing the initial

signs of slowdown in the Indian economy.

Budget impact

With a view to promote growth in the infrastructure sector,

the government projects an investment of Rs 55,00,000 Crores

on infrastructure in the 12th 5 Year Plan. The plan envisages a

PPP model in addition to new and innovative instruments to

mobilise funding in the infrastructure sector. There have been

other policy initiatives for funding of the infrastructure

projects, however, it will have to be seen whether they are

enough to meet the enormous needs.

Affordable housing had received supply side incentive in

recent years by way of incentivised funding, investment based

weighted deductions. This may not have been enough to make

affordable housing available, which is why now some demand

side incentives have been introduced such as setting up of

urban housing fund and enhanced deduction on borrowings

for houses costing upto Rs 40 Lakhs.

High end housing will feel the stress of lesser abatement in

service tax and also the introduction of TDS on transactions

of immovable properties in excess of Rs 50 Lakhs.

The budget is a mixed bag for the REI sector and some of the

demands which have been languishing for long have still not

been accommodated.


Key expectations

Infrastructure

In order to have accelerated growth the infrastructure sector

was expecting major policy decisions some of which are

summed up as follows:

• removal of MAT on infrastructure companies which are

enjoying tax holiday

• single window clearance for the infrastructure projects which

will remove the bottlenecks and help in timely completion of

the projects

• higher budgetary allocation in key infrastructure sectors like

irrigation, roads, power, ports, water supply etc.

• stimulus to be provided for development of infrastructure in

non-metro cities

Real estate

Real estate sector, on the other hand, was expecting quite a

few budgetary provisions to help them tide over problems

such as high interest costs and availability of finance. The

expectations included the following:

• introduction of „Real Estate Investment Trust‟ (REIT)

regulations

• additional deduction to home buyers on principal repayment

and interest of housing loan

• fiscal policies to reduce borrowing costs

• integrated township projects / special residential zones to be

covered under the definition of infrastructure for availing tax

holiday

• moderation of service tax levy on real estate projects

• exemption to consortium/ association of persons (AOP)

from “domestic reverse charge” of service tax


Key policy initiatives

Infrastructure

• encouraging Infrastructure Debt Funds to raise resources.

• India Infrastructure Finance Corporation Limited in

partnership with Asian Development Bank to offer credit

enhancement to infrastructure companies to enable them

to access the bond market

• in the year 2013-14, tax free infrastructure bonds to the

extent of Rs 50,000 Crores may be issued by various

institution

• assistance to be sought from Asian Development Bank and

World Bank for building roads in north-eastern states and

connecting them to with Myanmar.

• corpus of Rural Infrastructure Development Fund has been

raised to Rs 20,000 Crores for the year 2013-14

• Rs 5,000 Crores to be made available for construction of

warehouses, godowns, silos and cold storage units

• a regulatory authority is proposed to be constituted for road

sector to overcome the bottlenecks. Road projects of 3,000

Kms to be awarded in the first half of 2013-14

• allocation of Rs 14,873 Crores to JNNURM towards public

road transport. The major portion of the funds will be

utilised to support purchase of upto 10,000 buses, especially

by the hill States

Real Estate

An Urban Housing Fund in line with Rural Housing Fund is

proposed to be set. The objective of this fund is to alleviate

the huge shortage of housing in certain urban areas. The

Finance Minister has proposed allocation of Rs 2,000 Crore

for this purpose. The framework of the scheme is awaited,

however, it is likely that it would be in lines of the Rural

Housing Fund, and would have the objective of lending for

urban housing undertaken by weaker sections.


Direct tax proposals

Transfer of immovable properties being stock in

trade

• consideration for determination of business profit on the

sale of land and/or building held as stock in trade would be

higher of stamp duty value or actual transaction price.

Similar provisions exists for land and/or building held as

capital asset for determination of capital gains

• where the date of agreement to transfer and the date of

registration of the transfer is not same, the stamp duty

value as on the date of agreement would be considered

• this would have a significant impact on real estate

companies which have traditional land banks acquired at

much lesser values in a land owning company, as the actual

development activity happens in the flagship company by

acquiring the land or its development right from the land

owning company

Additional deduction of interest on housing loan

• an additional deduction up to Rs 1 Lakh of interest on

housing loan taken from financial institution is proposed to

be allowed to an individual

• the deduction would be available subject to the following

conditions:

- the amount of loan does not exceed Rs 25 lakhs

- the value of residential property should not exceed

Rs 40 lakhs

- the assesse does not hold any other residential

property on the date of sanction of loan

- loan should have been taken within the FY 2013 -

14

• the quantum of deduction shall be allowed to be carry

forwarded to FY 14-15 if not fully utilised in the FY 13-14

• no deduction of the said sum would be allowed under any

other provisions of the Income Tax Act, 1961 (IT Act)



Transfer of immovable properties under Tax

Deducted at Source (TDS) net

• under TDS mechanism, a new section 194-IA is proposed

to be inserted with effect from 1 June 2013 to recover tax

by way of TDS where transfer of immovable property not

being an agricultural land takes place.

• tax would be withheld @ 1% on the total sum paid as

consideration

• TDS would get triggered where the consideration exceeds

Rs 50 Lakhs

• a similar provision was introduced in last year's budget, but

did not find place in the enactment

• this would entail compliance burden in the hands of the

buyer and procedural simplifications are warranted

• it is not clear whether this provision will be applicable in

situations such as:

‒ when the immovable property is part of an

undertaking which is transferred under slump sale

or demerger

‒ when the buyer avails an housing loan and the

consideration is paid directly by the lender typically

on the day the property is registered in the name of

the buyer

Change in the definition of agriculture land

• the proposed amendment in the definition of capital asset

brings clarification to agriculture land, which is presently

dependent upon Government notification with respect to

distance from the local limits of each municipality or similar

authority

• as per the proposed amendment, in following situations the

agriculture land will be considered as a capital asset:

Distance from

municipality

limit

Population of

the

municipality

Capital asset

Within 2 kms more than 10,000

but does not

exceed 100,000

Yes

Within 6 kms more than

100,000 but

does not exceed

10,00,000

Yes

Within 8 kms .Exceeding

10,00,000

Yes



Withholding of taxes on interest paid to non-

resident

• Section 194LC of the IT Act is proposed to be amended so

as to provide concessional withholding tax rate of 5% in

respect of the interest income arising on subscription by

non-residents in long term infrastructure bonds issued by

an Indian company ( i.e. rupee denominated bonds). The

withholding tax rate of 5% would be applicable provided

non-resident deposits foreign currency in a designated bank

account and such money as converted in rupees is utilised

for subscription to a long-term infrastructure bond issue of

an Indian company. This amendment will take effect from

1 June 2013


Indirect tax proposals

Service tax

• standard rate of service tax is retained at 12%.

Abatement in case of construction

• for residential units having carpet area upto 2000 sq. ft. or

where amount charged is less than 1 Crore (including

amount of land), abatement remains at 75%. Therefore the

taxable value would be 25%

• in all other cases, abatement is reduced to 70% (accordingly

taxable value is increased from 25% to 30%)

The changes in the tax and

regulatory environment

constantly challenge large and

growing businesses,

particularly those operating

internationally.

How your business meets this

challenge can have a

significant impact on your

bottom line. The more your

business grows, the more

complex tax requirements can

become.

Grant Thornton can help you minimise your tax exposure

and highlight the risks presented by constantly evolving and

increasingly complex legislation.

Drawing on our knowledge and understanding of tax

regimes in India and around the world, we offer timely

information and independent advice.

Through legitimate planning, we consider issues that arise

within specific types of tax, as well as the tax implications

of a new project, or a change to the business.

We work with you to develop bespoke tax-planning

strategies suitable for your specific business structure, and

our solution-oriented approach is designed to help you

understand and minimise the tax challenges your business

faces.

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