Can you actually ‘budget’ for the real estate sector?

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: India The Indian real estate industry has seen significant changes in the past, apart from the spurt in prices to dizzying heights. The composition of industry players in the market has changed, with the earlier predominantly regional players consisting of private enterprises increasingly moving not only towards a pan Indian presence, but also approaching Indian and global capital markets for raising capital. The opening up of the sector to foreign investment in 2005 has seen a spurt of foreign players with deep pockets entering the arena. An interplay is notably visible with other industries including retail, infrastructure, hospitality and healthcare. Changes in rent control laws, repealing of land ceiling legislations in various states, increased computerization of land registration records, an in-principle approval of Real Estate Mutual Funds [‘REMFs’] and the recent introduction of draft regulations around Real Estate Investment Trusts [‘REITs’] are some of the other key changes which impact this sector.

On the tax front, the last Budget saw a phase out of the tax holiday for small housing projects as well as a withdrawal of the pass-through provisions for venture capital funds investments in the sector, coupled with the introduction of service tax on property rentals.

In this backdrop, the industry is asking for a total relook at several provisions relating to this growing industry panning direct taxes, indirect taxes and FDI regulations around both projects and debt finance. While there are state and local level taxes – among others, stamp duty and municipal taxes - which also significantly affect this sector, these may not be covered by the Union Budget.

Income earned by an equity oriented Mutual Fund is exempt both from income tax as well as tax on income distribution. The two products in the pipeline - REMF’s and REITS - would definitely get a boost if the Budget grants a similar tax treatment to these products since this treatment may result in a position that investors will actually have a lesser income tax outflow if they were to invest in real estate through these products as compared to investing directly. One of the arguments in favour of such a preferential treatment is that these products provide an opportunity to retail investors to invest in collective investments schemes dedicated to real estate, which was hitherto restricted to high net worth individuals and institutional investors.

The CBDT has recently introduced a new set of rules relating to the Industrial Park Scheme which govern the availability of the income tax holiday to developers of such Parks. One change from the earlier rules is that the units in the Industrial Park are now restricted to units undertaking manufacturing activity, with the result that ITeS/Service sector units are now excluded. This would restrict the marketability of units located in such Parks. There is also a big question raised around applications filed earlier for approval of Industrial Parks, which, in all fairness, deserve to be treated as per the provisions of the earlier rules.

Reverse mortgages is another recently introduced product which has thrown up it own set of issues around taxability. A beneficial clarification would certainly be helpful in avoiding unnecessary litigation, especially given the target audience which it is aimed at.

Redevelopment of existing old constructions is an important aspect of bringing infrastructure in line with international standards. Typically, apart from higher local municipal taxes, there are several non-tax reasons which come in the way of such redevelopment. Granting of specific income tax concessions may provide some relief/ incentive in this regard.

And lastly, with tell-tale signs of global warming resulting in increasing environment consciousness, the extra effort and cost involved in development of a ‘green’ building certainly deserve recognition and reward from a tax perspective.