The new year began on a confusing note for the real estate sector. As everyone digested the full import of the so-called liberalisation of FDI norms for the sector, it seemed like a case of déjà vu. Not just were the changes anything but liberalisation, they brought back the ghost of retrospective changes since investments that would otherwise have been unlocked with a stroke of the pen had again got locked, and this time till completion of the projects. The Budget is not normally a panacea for most of the demands of this sector, and FDI changes are anyway not formally a part of the Budget, but if there is one more stroke that can undo the chaos, let it be a “clear” clarification on the new FDI policy.
This alas will be similar to the adage that goes “If wishes were horses, beggars would ride”. Hence, maybe we should look at what else Budget FY16 can attempt to solve.

On the service tax side, ever since the introduction of the comprehensive basis of taxation of services in July 2012, taxability of transfer of development rights in land, revenue share of developers in plotted developments, transactions in the secondary market like resale by investors, etc, have emerged as issues requiring attention. These issues have caught this sector unawares, as the business practice is to treat such transactions as immovable property transactions. Indeed, the tax authorities apply a substance-over-form approach and seek to charge tax even before it is due, but when it comes to service tax, the form is supreme, and such transactions are made liable to service tax. With the added burden of stamp duty, clarity is required on what constitutes “transfer of title in immovable property” so that genuine transactions can be excluded from the service tax net.

The other major area that needs attention and clarity is the tax framework of land-owner–developer transactions. While developers have reconciled to the fact that such transactions attract service tax, there is ambiguity and diverse practice on the method of valuation, point of taxation, etc. As a result, developers, even after paying service tax on such transactions, are not certain of attaining closure, and litigation is inevitable. Similarly, there are divergent practices and views on whether landlords are required to pay service tax on sale of their portion of constructed area before completion of construction. What adds to the misery is that land-owners are expected to pay income-tax at the time of signing joint development agreements, even before earning any real income. What started off as isolated joint development arrangements are now commonplace in this sector, and it is time that there is a recognition of this business model and a proper tax framework laid out.

An intriguing aspect that has continued unaddressed for the last several years is that commercial property developers are burdened with high tax costs as no credit is available on construction services used for developing a commercial property which is then rented out. If the intention is to transition smoothly into the GST regime entailing free flow of credits and elimination of cascading effect of taxes, then it is imperative that the embargo on taking construction related credits should be removed. There is also the issue of credits of excise duty on cement, steel and other construction materials for commercial developments, which again results in tax pile ups in the system. Removal of these costs and facilitating a free flow of credits would be a big catalyst to the sector.

On the income-tax side, all eyes will be on REIT-related changes. After Sebi unveiled a regulatory regime for REITs and infra investment trusts sometime last year, Budget 2014 followed it up by putting in place a tax regime for such vehicles. There were some very fundamental gaps in the provisions spelt out as a result of which the euphoria around REITs died quickly. With further softening of interest rates and urgent need to unlock liquidity, REITs need to see the light of day, and this can be done only if the exemption from dividend distribution tax is made applicable to the property owning SPVs. Patchy solutions such as permitting REITs to invest in LLPs will not work, and this is the change that can singularly make REITs a reality in the near term. Of course, alongside this, it is quite surprising that India’s foreign investment and external commercial borrowing policies are yet to be amended to enable REITs and one hopes that this does not become another classic case of different wings of the government not working in tandem to give effect to a major policy initiative.

Among the many investment facilitation measures being announced, it will augur well for the government to set up an agency whose only job is to monitor critical policy initiatives of the government and ensure all necessary regulatory and legal changes are brought about swiftly and in a coordinated manner to enable the policies actually see light of day. A tall ask? Probably not from this government.

By Abhishek Goenka
With inputs from Sharath Rao and Prashanth Bhat, directors, BMR & Associates LLP
The author is Partner, BMR &Associates LLP.
Views are personal