The real estate sector has been in the limelight of reforms over the last few years with the relaxation of Foreign Direct Investment (FDI) norms, introduction of the Real Estate Investment Trust (REIT) regulations, the government’s mega housing mission 2022.
While one would have expected these reforms to have created significant momentum in the sector, the on-ground picture does not seem to reflect it thus far with not a single prospectus for REIT being filed and even the real estate FDI reflecting a declining trend during 2015-16 and 2016-17.
The demonetisation and proposed amendment to the Benami Properties Act seem to have added to the woes of the industry in the short term with the housing and office space demands having slacked though there are hopes of these yielding long term benefits with the falling interest rates and anticipated government thrust to the sector.
In the coming few months, the real estate sector is set to undergo a revolutionary transformation with the onset of Goods and Services Tax (GST) and the Real Estate Regulation Act (RERA), both of which are expected to be significant game changers. It is anticipated that these changes will result in significant consolidation in the industry with the small unorganised players being washed away and the larger organised players taking greater market share.
In summary, the industry is all set for greater challenges in 2017-18 and, expectedly, the Budget 2017 wish list of the real estate industry is a long and demanding one. Some of the key items that could form part of the Budget 2017 wish list for the real estate sector are:
Policy and direct tax
Measures to boost housing demand
Easing of policies and giving a thrust to the real estate economy demand creation would be the obvious agenda items to revive the sector. On the supply side, the industry requires support in terms of rationalisation of land acquisition policies, project based financial support from governmental agencies, and extension of special status benefits (some of them being priority sector status, interest rate subventions, eligibility to access External Commercial Borrowings), which are currently limited to affordable housing projects, to the overall construction development sector. From a tax perspective, the scope of affordable housing projects qualifying for the tax holiday, needs to be widened to make it attractive for new project investments.
On the demand side, enhancing the interest deduction on self-occupied properties needs to be considered to help the industry clear surplus inventories. Also, the scope of the tax incentive provisions under Section 80EE of the Income-tax Act, 1961 (Act) needs to be enhanced to incentivise home buyers in the key metros which have the maximum unsold inventories.
Further rationalisation of REIT tax regime
While some amendments in the taxation regime for REITs have been announced in the past and the SEBI has recently further liberalised REIT regime allowing multiple level SPV structures, relaxation of holding under construction properties, increasing the number of sponsors to the REIT amongst other changes. However, there are still some unaddressed concerns in respect of the taxation regime that the Government should seek to address in this Budget to provide the much required kick-start, the key ones being;
*Extending the exemption from Dividend Distribution Tax (DDT) to multiple level SPV structures, given that they are now permitted under the SEBI regulations;
*Tax exemption on the transfer of assets by sponsors to the REIT;
*Clarity on deductibility of expenses in the hands of the REITs; and
*Applicability of the tax exemption provisions on the contribution of the shares of the SPVs by sponsors into the REIT.
Clarity on key taxation of joint development agreements and rental from commercial properties
Two of the key tax issues which have been hounding the real estate fraternity pertain to taxation of joint development contracts and characterisation of income from commercial properties developed and leased. Significant time, efforts and costs are being incurred by the industry to defend litigations on these matters. The need of the industry is to obtain clarity on these taxation issues by way of necessary amendments or explanations to the existing tax provisions.
Revival of Special Economic Zones (SEZs)
SEZs which were once perceived to be attractive investments by both investors and tenants have slowly lost their sheen and demand due to the non-committal tax policies of the government. The removal of the exemption from Minimum Alternate Tax (MAT) in 2012 followed with the sunset of March 2017 for developers and March 2020 has been the major cause for the declining interest. The industry has been pleading for a relaxation on both aspects. While there seems to be an expectation for rationalization of the MAT provisions in general which if comes through should provide some relief to the real estate sector, the Government may also want to consider extending sun set clause to lower the brunt being faced by the real estate sector.
Joint development contracts and Income from commercial properties
On the service tax front, there remains ambiguity on valuation for payment of service tax and timing of such payment, and what is required is a comprehensive set of guidelines after considering the whole gamut of transactions and their different aspects.
Also, a critical deficiency under the current regime is the non-availability of construction related credits for commercial projects, which coupled with higher rate of taxes has an adverse impact on the corporates due to higher rental costs – the construction related credits should be again made available for commercial projects as the said restriction leads to cascading effect of taxes.
Taxability of certain immovable property transactions
While the ‘transfer of title in immovable property’ is excluded from service tax, there persists confusion as to whether transactions, such as, transfer of development rights in land, agreement of sale, revenue share of developers in plotted developments, transactions in the secondary market by investors, etc, can be treated as transfer of title in immovable property, in sync with business practice, and hence outside the scope of service tax. These aspects need immediate attention to avoid high stake litigation.