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Significant change in taxation governing REITs has been announced in the Budget.
However Union Budget 2014-16 has not announced anything to incentivize the affordable housing sector.
Budget Provision
First phase of Gujarat International Finance Tec-City (GIFT) will soon become a reality and appropriate regulations will be issued in March 2015.
Rate of corporate tax will be reduced from 30% to 25% over the next 4 years. But the budget has increased the surcharge by 2% to 7% and 12% for companies whose total income is in the 1-10 crore and above Rs 10 crore respectively.
Budget 2015: Complete Coverage
Allocation of Rs 22407 crore for housing and urban development
Rationalised the capital gains regime for the sponsors exiting at the time of listing of the units of REITs and InvITs, subject to payment of Securities Transaction Tax (STT).
The rental income of REITs from their own assets will have pass through facility. The proposed changes in Tax regime governing REIT
the sponsor would get the same tax treatment on offloading of units under an Initial offer on listing of units as it would have been available had he offloaded the underlying shareholding through an IPO.
the Finance (No. 2) Act, 2004 be amended to provide that STT shall be levied on sale of such units of business trust which are acquired in lieu of shares of SPV, under an Initial offer at the time of listing of units of business trust on similar lines as in the case of sale of unlisted equity shares under an IPO.
the benefit of concessional tax regime of tax @15 % on STCG and exemption on LTCG under section 10(38) of the Act shall be available to the sponsor on sale of units received in lieu of shares of SPV subject to levy of STT.
Budget 2015: Complete Coverage
any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt;
the distributed income or any part thereof, received by a unit holder from the REIT, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such REIT, shall be deemed to be income of such unit holder and shall be charged to tax.
the REIT shall effect TDS on rental income allowed to be passed through. In case of resident unit holder, tax shall deducted @ 10%, and in case of distribution to non-resident unit holder, the tax shall be deducted at rate in force as applicable for deduction of tax on payment to the non-resident of any sum chargeable to tax .
no deduction shall be made under section 194-I of the Act where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset held directly by such REIT
Customs tariff on iron & steel and articles of iron or steel increased from 10% to 15%.
However, there is no change in the existing effective rates of basic customs duty on these goods
Industry wish-list
Industry status to real estate development
Infrastructure status should be given for development of an integrated township and group housing on area more than 10 acres involving provision of residential, educational, medical, community, commercial or institutional buildings and creation of required facilities including roads, water supply, water treatment, sanitation and sewerage systems and solid waste treatment and management systems.
Provisions of section 80IB (10) be revived in the same existing format and project funding under this sector may be treated as “Priority lending” by banks and financial institution.
Unsold housing stock held in trade by a developer should be kept out of the purview of section 22 of IT Act.
Income tax deduction u/s 80IB(10) available to undertakings developing housing projects for projects approved on or before 31st day of March, 2008 has ceased to exist after March 31, 2013 as the sunset clause for project approval has not been extended. So 8oIB (10) benefit has to be reintroduced to incentivize private sector developers to contribute to smaller units.
Land and building construction cost should be made part of capital expenditure for investment linked incentives u/s 35AD of Income Tax Act to boost developer to undertake construction of social and rental housing. Also the benefit should be automatically transferable to amalgamated / demerged / transferee company.
Deductions under section 80C of IT Act should be increase to 2 lakh and out of that Rs 2 lakh, there should be exclusivity of Rs 1 lakh for payment of principal borrowed for the purchase of a residential house. This will help in boosting housing stock. A separate limit for payment towards purchase of a house or repayment of principal on housing loan was available earlier u/s 88.
Deduction u/s 80 CCF be revived and increased to Rs 1 lakh. This will help infrastructure development financing, besides providing relief to tax payer.
The deduction on account of interest payment available under section 24 should be made applicable from the year in which capital was borrowed as for principal u/s 80C and should be to the extent of full interest paid at least in respect of one house.
In case this is not agreed, at least the limit of Rs 2 lakh should be raised to Rs 3 lakh for owner occupied houses. Also, three years period for acquisition / completion from the year of borrowing should be dispensed with. This will provide much needed impetus to housing sector which is reeling under huge housing shortage.
Section 43CA, inserted by Finance Act 2013, on lines of Section 50C, provides for considering valuation assessed or assessable by any authority of State Govt for the purpose of payment of Stamp Duty as the value of consideration received or accruing as a result of transfer of an asset being land or building or both, by the assessee.
In all fairness the actual sale value should only be the basis for computing tax on profit and gain from land and building assets and not the notional income.
In real terms, the provision u/s 43CA will create lot of harassment to the real estate developers and may become big deterrent.
In view of the above, it is suggested that the new section 43CA be dropped all together. In case it is not possible to agree to the above, primary market transactions should at least be kept out of its purview.
Section 2(47) of IT Act be amended to provide that in case of a JDA between land owner and developer, the profit or gain from the transfer of land under a contract referred to in section 53A of TP Act 1882 will be deemed completed only on completion of the development project or when share of revenue from the sale of the property or share of built-up area, on completion of the project, is received by the land owner.
A suitable section under Chapter IV Section 45 - Computation of Income from Capital Gains be added to deal with Capital Gain in Joint Development Agreements.
Tax exemption u/s 54 for capital gain arising from sale of any capital asset as long as it is invested in acquiring on residential house should be removed and the scope be broadened by allowing the exemption as long as the entire capital gain is invested, whether in one or more houses.
Capital gain tax benefits under Section 54B on sales of agricultural land to buy another agricultural land and section 54F for any asset to buy any residential house extended for individual and HUF should be made applicable to companies and partnership firms as well, to promote housing in urban areas.
Provision section 194I-A be done away with, at least for primary market. Section 194-IA inserted by Finance Act 2013 makes transferee liable to deduct TDS at the rate of one percent of the value of consideration paid to transferor and deposit in Govt. treasury, where value of consideration exceeds Rs fifty lakh.
Income from renting of properties should be taxed at a flat rate of 10%.
Provision of rental housing on a large scale will require the services of Property Management Firms.
In order to make property management a viable activity, income of firms which are wholly engaged in maintenance / repair and other specified management services for rental housing blocks may be brought within the ambit of Section 80 IB (10)and Section 10 (23G).
High cost of houses and high property taxes lead to a low rate of return (ROR) from rental housing making renting out an un-remunerative proposition.
To improve the effective ROR from renting, it is suggested that the deduction from rental income under Section 24(a) be increased from 30% to 50%.
This will promote rental housing. For women and Senior Citizen, the deduction could be 100%, keeping social requirements and empowerment of women in view.
Deduction for irrecoverable rent accounted for in earlier years should be made u/s 24 of I.T. Act.
ECBs be allowed in all spheres of housing and real estate development, as also in SEZ projects.
Investment in HFIs should be an eligible investment for pension funds, Insurance funds and Provident Funds.
Banks may increase their allocation for housing from the present 3% to 5% of their incremental deposit.
The additional 2% incremental allocation may be earmarked strictly for canalizing it through housing finance companies registered with NHB.
To promote FDI in real estate sector 1) remove built up area requirement like land; 2) allow one non-resident to sell to another non-resident as long as project comply FDI norms; and allow FDI in under construction projects.
Dividend distribution Tax (DDT) should be done away with on distribution of dividends by Special Purpose Vehicle (SPV) to REITs. Similarly stamp duty exemption should also be made available.
For exemption under IT ACT 1961, the cutoff date for completing development of SEZs be reset to 31st March 2015 and for starting manufacturing etc to 31st March 2017.
Stock to watch
Brigade Enterprises, Prestige Estates, Godrej Properties, DLF, Unitec, Mahindra Life Space and Kolte Patil.
Outlook
Announcement regarding GIFT city project near Ahmedabad is a welcome initiative for the realty sector as it provides strong growth opportunity and trigger demand in medium term to long term.
Especially players such as Brigade Enterprises, which planned an investment of Rs 500 crore in GIFT is to gain much being the first mover.
Similarly the removal of significant change in tax regime governing REIT is a good for the sector as it help them to liquidate their commercial/hospitality assets and retire their debts.
The extending ‘Visa on entry’ to more countries will bring in more tourist and help hospitality real estate segment of the industry.
The impact of rise in customs duty on steel and steel product in domestic price of steel and steel products have to be seen, if there is any hike that being a key material for real estate sector will increase the cost of construction.
Similarly the impact of rise in green cess on coal in cement prices has to be seen.
However the rise in tax surcharge by 2% and no efforts to boost the demand is a disappointment for the sector. O
