The industry is looking forward to the Budget to provide much needed relief and growth impetus. The real estate and infrastructure sectors are no different and given the significant impact that they both carry, through various forward and backward linkages and impact on employment, following are key asks for infrastructure and real estate players.
Given the scale of capital required and lack of funds in the sector, it becomes all the more imperative for the government to provide the backing and support to the industry players in the sector by way of tax incentives, accelerated depreciation, etc. Under the existing provisions of Section 80IA of the Act, deduction of 100% profits to an assessee is available (for 10 out of 15 years), if such assessee begins to generate power at any time during on or before March 31, 2017. Given the need of the hour for power, there is a need to extend the sunset clause by further five years to March 31, 2022.
Furthermore, the Finance Act 2016 has restricted depreciation to 40% w.e.f April 1, 2017 on all block of assets (whether old or new). With the increased focus of the government on renewable energy, the rate of depreciation on renewable and solar energy devices should be restored to 80% in order to incentivise the industry players and send out signal that India is serious about its commitments to climate change.
The government should undertake measures to incentivise people to invest in the sector by way of funds, units, etc., issued by companies in infrastructure sector. In past, section 10(23G) of the Act (omitted by Finance Act, 2006 w.e.f. April 1, 2007), provided for exemption of income by way of dividend, interest and long term capital gains arising out of investments made in an enterprise engaged in the business of developing, maintaining and operating an infrastructure facility. In order to further attract investment in infrastructure sector, the said section should be re-introduced under the Act.
Making strategic investments in companies with intention of acquiring controlling interest and management of the group has been a common practice in the infrastructure sector. In these types of structures, there has been a lot of hue and cry on account of non-availability of deduction to such holding companies (companies which hold any shares of companies having projects) as the tax authorities tend to disallow the expenditure incurred by these companies by contending that such expenditure was incurred to earn exempt income (section 14A of the Act). Given the concessions and debt covenants associated with assets, the investments are made in separate special purpose vehicles and in essence, no/small expenditure is incurred for maintaining this portfolio. Thus, adequate provisions should in place to ensure that expenses incurred by these holding companies should not be disallowed under section 14A.
Minimum Alternate Tax (MAT) of 18.5% of book profits has impacted significantly cash flow of companies who otherwise have low taxable income or have incurred tax losses. Further, this has also diluted significantly the tax incentives offered under Chapter VI-A of the Income-tax Act,1961 to eligible businesses and infrastructure companies, as the difference between current corporate tax rate at 30% and MAT at 18.5% is not significant. Exemption should be provided to these companies from MAT liability.
Section 194IA of the Act casts an obligation on the buyer to withhold tax @1% on consideration paid for acquisition of immovable properties. The provision poses onerous compliance requirement even on small purchasers. There is no clarity on (i) whether part of building/apartments are covered in the provision, (ii) implications under co-ownership of property, (iii) loan arrangement from banks for purchase of properties, etc. The same has led to a lot of practical difficulties and undue hardship to buyers. Thus, the said provisions should be done away with or relaxations should be introduced for individual purchasers. Alternatively, given the prices of real estate in the market, the threshold limit for applicability of the above provision should be increased from R50 lakh to R1 crore.
In relation to business trusts, although the government has made significant changes to streamline the regulations as well as tax framework for business trusts (REiTs) and InvITs), there are certain consequential amendments that are need in the tax framework:
*Tax treatment (capital gains exemption and MAT deferral) available to sponsors on transfer of shares of SPV to business trust should be extended when sponsor transfers shares of the Holding company/ capital assets/or interest in a firm/LLP to the business trust against exchange of units
*Units of a business trust should be accorded same treatment as provided for equity shares of a listed company. Accordingly, period of holding for units to qualify as a long-term capital asset should be more than 12 months as compared to the current 36 months.
*Exemption from provisions of section 2(22)(e) and 79 of the Act on companies held under the Business Trust, in order to make structure more efficient
*Similar to a beneficial rate of tax on interest distribution made to NRIs, a beneficial rate of tax should be introduced for taxation of rental income distribution to the non-resident investors.
In order to meet the ambitious objective of ‘Housing for All by 2022’, it is necessary that tax break on interest on loan taken for acquiring house property should be increased to R500,000 from existing limit of R200,000.
On the indirect tax front, there is a need to review the valuation provisions as provided in the model GST Law and provide for exclusion of land value or an abatement, of say 70%, towards the value of land. Alternatively, sale of under construction properties should be taxed at lower/concessional rate of GST, say 12%. In addition, since property constructed is a business asset and the income of rentals generated out of this asset is subject to GST, credit for GST paid on goods and services used for construction purposes should be allowed without any restriction.
Ambiguity towards characterisation of rental income as ‘income from house property’ or ‘business income’ has led to a debate with the tax authorities thereby leading to litigation. It is necessary that an express provision is introduced under the Act classifying such income as business income. Such characterisation would ensure that uniform practices are followed across industry and remove litigation.
It is the need of the hour that adequate clarifications/amendments are also provided in relation to joint development agreements. Adequate clarity should be provided in terms of taxable event in the hands of land owners.
Even though this government has taken substantial number of measures towards creating India a business friendly jurisdiction, addressing the aforesaid challenges and taking measures in the right direction would provide the much needed boost and impetus to the infrastructure and real estate sectors and consequential upliftment of GDP.
(With inputs from Abhishek Arora, manager, EY)
The author is tax partner and leader – real estate, EY India. Views are personal