Union budget 2010 and impact on real estate industry

Some key policy measures announced by the Finance Minister which could impact the real estate industry are as under:

• Increase in outlay under Indira Awas Yojna, for houses to weaker sections of society: The Government considers Indira Awas Yojna to be a popular rural housing scheme for weaker sections. Taking note of the increase in the cost of construction, Finance Minister has allocated a sum of INR100 billion towards the project in year 2010-11. The unit cost under this scheme has been raised to INR 45,000 in plain areas and to INR48,500 in the hilly areas.
• Interest subvention on housing loans: A scheme was introduced by the Finance Minister in Union Budget of  2009-10, wherein an interest subvention of 1% was available on housing loans of upto INR1 million, provided the cost of house does not exceed INR2 million. This scheme has now been extended till 31 March 2011. The Finance Minister has allocated a sum of INR7 billion towards the project in year 2010-11.
• Allocation for Housing and Urban Poverty alleviation: Allocation has been raised from INR8.5 billion to INR10 billion in year 2010-11.
• Increase in outlay under the Rajiv Awas Yojana for slum dwellers and urban poor: A sum of INR1.5 billion was allocated towards this scheme last year. The scheme aimed to extend support to States that were willing to provide property rights to slum dwellers. In year 2010-11, the Government has further encouraged the states to create a slum free India by increasing its allocation under the scheme by almost 700 %, pegging it to INR12.7 billion.
• External Commercial Borrowings (“ECB”) for cold storage or cold room facilities: As a part of ‘farm to market initiative’, ECB’s will now be available for cold storage/ cold room facilities, including farm level pre-cooling, preservation and storage of agricultural and allied produce, marine products and meat which should give a credit breather to the warehousing sector within real estate industry.
• Policy initiatives are focused on housing for economically weaker sections, poverty alleviation and to some extent affordable housing sector has been covered. The industry expectations on clarity on the FDI front and much needed succor on credit availability has not really been addressed.

Direct tax impact:

• Threshold slabs for individual taxation broadened which should result in more disposable income in the hands of the consumers.
• Corporate tax rates remain unchanged. However, surcharge in the case of a domestic company having income above INR10 million reduced from 10%  to 7.5%.
• Minimum Alternate Tax (MAT) hiked from 15% to 18%.
• Ambiguity surrounding the conversion of a company (private and un-listed public) to a Limited Liability Partnership has been laid to rest by exempting such a transaction from capital gains tax. However, stringent conditions have been prescribed and the exemption is available only to companies whose total sales/ turnover does not exceed INR6 million in any of the 3 years preceding the year of conversion.
• Ambit of ‘Income from other sources’ has been broadened to include shares received by a company (excluding company in which public are substantially interested) or a firm without consideration or for in-adequate consideration with certain exceptions. This could now result in taxing a transfer of shares between 2 group companies (for e.g. from a holding company to 100% subsidiary) at a price which is below the fair market value which could result in tax outflows even in internal restructuring exercises.
• Capital expenditure (excluding expenditure for land, goodwill or financial instrument) incurred, for developing, building and operating, a new hotel of two star or above category, anywhere in India, as classified by Central Government and commencing operation  after 01 April 2010, would be eligible for 100% deduction under section 35 AD.
• Rationalization of section 80 IB (10) to increase the period of completion of a housing project from four to five years. Built up area norms specified for shops and commercial establishments included in the aforesaid housing project have been revised to 3% of aggregate built up area of housing project or 5,000 square feet, whichever is higher.
• Provisions for claiming deduction for expenditure on which taxes have been withheld at source but deposited late, have been relaxed. Under this, amounts such as interest, commission, brokerage, rent, royalty etc. payable to residents would be eligible for deduction in the same financial year, even where taxes deducted (anytime during the year) have been deposited up to the due date of filing return of income for the respective year .
• Turnover threshold limit for getting accounts audited (under section 44AB) has been relaxed to INR6 million from existing limit of INR4 million. While the thrust to affordable housing and extension of interest subvention are welcome steps, expectations for reinstatement of the tax holiday, increase in deduction on housing loans (principal/ interest), clarity on industrial parks, etc have not been met. With enhanced infrastructure spending, the sector could rely on indirect benefits from the same.

Service tax

• Service tax rate maintained at 10.3%.
• Definition of taxable services ‘construction of complex services’ and ‘commercial or industrial construction service’ have been amended to provide that unless the entire consideration of the property is paid after completion of construction (ie after issuance of completion certificate by the competent authority), the activity of such construction would be deemed to be taxable service provided by the builder to the prospective buyer.   Accordingly, service tax would be levied on consideration received by the builder for construction under the said arrangement.
• Relevant definition of the taxable service provided in relation to renting of immovable property has been amended with retrospective effect from 1 June 2007 to clarify that renting of immovable property per se would constitute a taxable service.
• Service tax to be levied on lease of vacant land if the lessor undertakes construction on such land for furtherance of business or commerce during the tenure of lease.
• New taxable service category introduced to include within its ambit the special services provided by a builder to a prospective buyer over and above the construction services on extra charges.  Such special services include providing preferential locations or external/ internal development of complexes, maintaining parks, laying of sewerage and water pipelines, installation of fire-fighting equipment, power-back up etc.
• Charges for providing parking space have been specifically excluded from the scope of above services.

Excise duty

• Peak Excise duty rate has been increased from 8% to 10%. Accordingly, peak effective Customs duty rate has increased from 24.42% to 26.85%.
• Excise duty rates on cement, Portland cement and cement clinkers have been increased.  This would lead to an increase in the cost of construction activities. Indirect tax proposals in Budget 2010 could severely impact the RE sector through increased cost of housing thereby weakening the recent revival in the housing sector. Taxes on renting of commercial property and lease of land could further slow down commercial segment. On an overall basis, the indirect tax proposals do not augur well for the sector.