Budget 2018: Union Finance Minister Arun Jaitley will present Prime Minister Narendra Modi’s Union Budget on February 1. Modi government fifth budget will be a different from Budget 2017. This will be the Modi government’s last full budget before the 2019 Lok Sabha elections. 2017 saw a bevy of reforms like GST, RERA and demonetization which had a major impact on the real estate sector in India. With these changes, the government propelled investor and customer confidence and brought in accountability and transparency. The long standing vision of the government to provide ‘Housing for all’ and the measures on ‘Smart Cities’ will help create, organize and diversify the real estate industry. Though we see such positive announcements being made, real estate industry expect changes which can provide further thrust to the real estate development story in India. Key changes that real estate industry is looking forward from Budget 2018 are:
Taxability of Real estate deals in case of inadequate consideration
Income tax provisions deem that valuation of real estate property should be carried out at least at a stamp duty valuation which in turn folds up to the value of share transaction. In case the same is below stamp duty value, the difference is taxable as income in the hands of the buyer and the seller as well, thus resulting in double taxation. Modi government should look into the issue in Budget 2018. In many cases, stamp duty value is much higher than the market value or the consideration agreed between the buyer and the seller. The value could be lower due to number of factors such as encumbrances, distressed asset etc. because of which the commercial value of the property maybe lower. Dealmakers have been facing hurdles in closing the transaction due to the stamp duty valuation. Transactions which are being done on account of distressed sale or are for commercial purpose could be specifically carved out.
Joint Development Agreement
The Finance Act 2017 inserted sub-section (5A) in the existing section 45, to provide that capital gains arising to an individual or Hindu undivided family under a Joint Development Agreement shall be taxed in the year in which completion certificate for the whole or part of the project is received, based on the stamp duty valuation on the date of issue of certificate of completion as increased by cash consideration received, if any. The applicability of this section has been restricted to individuals and HUFs. The difficulty envisaged by the legislature is faced by all assessees and therefore, this section may be made applicable to all classes of assessees in Budget 2018.
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Need for a relook at GST and stamp duty
Currently only under constructed property is included within the ambit of GST. Sale of real estate property after completion and receiving completion certificate does not attract GST. However, this has resulted in denial of input tax credit and other taxes. Further with GST @ 12%, there is an increase in the overall cost impact to the consumer vis a vis an earlier 5%-6% of indirect taxes. This needs to be revised downwards, to benefit the consumer, leading to a further push in sales volumes. Further, stamp duty is an added burden on the customer inspite of paying GST. Subsuming stamp duty within GST or rationalising the norms for stamp duty across different states will be a welcome move in the Union Budget and provide relief to end customers.
Time for REITs to take off
Finance Minister in the past has relaxed applicability of taxes such as capital gains, dividend etc. in case of a REIT. However a few more amendments in case of REIT could pave the way for its take off in coming years. Specific exemption should be introduced in section 47 to exempt transfer of assets held by developer to REIT, from capital gains tax. Holding period for a unit of the REIT to qualify as long term capital asset should be more than 12 months (and not more than 36 months) given that character is akin to equity in nature. Along with the expectation of allotting real estate an industry status, single window clearance, reduced cost of land, lower rates of interest on borrowings should be implemented. A push from the government is required for wide scale proliferation of these objectives for cost reduction in real estate development. This may induce the developer to pass on benefit of lower cost of housing to the end user. The Modi government should look into the issue in Budget 2018.
Hemal Mehta is Partner, Deloitte India. Neha Rupani is Senior Manager with Deloitte Haskins and Sells LLP