prpri Budget 2010 and its Impact on Real Estate sector Budget 2010 and its Impact on Real Estate sector

Real Estate sector which is slowly coming out of the Mid 2008 slump, has received good support from Union Budget 2010-11. While the budget has encouraged affordable housing below Rs 20 lakhs with 1% interest subvention for housing loan upto 10 lakhs and extension of benefits available under section 80IB by one more year, extension of some services are extended so as to bring under service tax impacting the industry in difficult times.

However the industry which asked for industry status for township projects, changes in tax deduction on housing loans relaxation of ECB route to fund projects etc has been overlooked.

Budget provisions

Extended the interest subvention scheme of 1% on all individual housing loans upto Rs 10 lakh for units costing upto Rs 20 lakh till March 30, 2011.

Housing projects which are eligible for benefits U/s 80IB(10) as being approved after 1st April 2005 and before 31st March 2008 by respective local bodies will now be allowed to be completed in five years instead of earlier 4 years from the date of sanction.

The definition of ‘Construction of complex service’ is being clarified/ scope extended that unless the entire consideration for the property is paid after the completion of construction (i.e. after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly.

Definition of ‘Renting of immovable property service’  as far as service tax is amended to  (i) provide explicitly that the activity of ‘renting’ itself is a taxable service. The change has been given retrospective effect from 01.06.2007. Similarly the rent of vacant land where there is an agreement or contract between the lessor and lessee for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease will now be levied service tax.

Excise duty on cement (produced by non mini cement plants)is increased to Rs 290/ tonne (from Rs 230/ tonne) if retail sale price is not exceeding Rs 190 for 50/ kg bag or Rs 3800/ tonne or 10% of retial sale price (from 8%) for cement if retail sale price exceeding Rs 190 per Rs 50 kg bag or Rs 3800/ tonne. In case of cement sold other than packaged form 10% or Rs 290 per tonne which ever is higher compared to 8% or Rs 230/ tonne.

Excise duty on steel, PVC pipes, ceramic tiles increased from 8% to 10%.

The surcharge on corporate tax has been reduced from 10% to 7.5% while MAT has been hiked from 15% to 18%.  This should benefit many real estate companies, as most of them are outside the purview of MAT, but will benefit from effective reduction in corporate tax.

Impact analysis

While the hike in excise duty on cement, steel and other inputs will pinch the industry at a time when the demand is on slow recovery path, as the industry could not afford to pass on the same to the homebuyer.

However the industry players who have got their 80IB (10) eligible projects delayed can take comfort with the time for completion being extended to 5 year from current 4 years. Moreover interest subvention scheme of 1% on all individual housing loans upto Rs 10 lakh (Rs 1 million) for units costing upto Rs 20 lakh (Rs 2 million) till March 30, 2011 is a positive move to encourage affordable housing units costing upto Rs 20 lakhs.

Since real estate sector is more interest sensitive this 1% subvention will reduce the EMI significantly and improves affordability. Further more and more developers will conceive projects in this price segment to tap the potential auguring well for the sector on a whole. However the impact of bringing rental of vacant land into service tax as well as other changes in service tax has to be seen.

Since the demand for real estate being a derived one, the growth thrust as well as more money on middle class individual will benefit the industry by way of demand pickup.

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