RealEstate Construction PoV 2014

8/11/2019 RealEstate Construction PoV 2014

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Real estate andConstructionPost-budget sectoralpoint of view

INDIA UNION BUDGET 2014



Table of contents

1. Context

2. Key policy/fiscal/tax proposals

3. Unfinished agenda



© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated withKPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3

Where are we• Contribution to GDP: According to the Economic Survey 2013-14, the real estate and ownership of

dwellings contributed to 5.9 per cent of India’s GDP, registering a growth of 5.6 per cent in 2012 -13.Real estate in particular, grew by 26.1 per cent

• Contributor to employment creation: The real estate and construction sector is the second largestemployer generator in India after agriculture

• Share in FDI: The FDI inflow fell 8 per cent in 2013-14 to USD1.2 billion, accounting for about 5 percent of the total FDI inflow

• Rising prices: As per the National Housing Bank (NHB) Residex index, the housing prices in major

cities have skyrocketed between 2007 and 2014. During this period, 24 cities witnessed an increasein housing prices, with the maximum increase in Chennai (249 per cent), followed by Pune (132 percent), Mumbai (129 per cent), and Bhopal (126 per cent)

• Housing credit : Institutional credit for housing investment has grown impressively at a CAGR ofabout 18-20 per cent per annum, with mortgages as a percentage of GDP rising from 3.4 per cent in2001 to 9 per cent in 2012-13. However, it is still well below countries like China, Thailand, andMalaysia

• Significant supply gap: As per a planning commission report published in 2012, India faces ahousing shortage of about 1.9 crore in urban areas, and about 4 crore in rural areas, taking the total housing shortage in India to about 6 crore. More than 95 per cent of this housing shortagebelongs to the urban and rural poor i.e. Lower Income Group (LIG) and Economically Backward

Section (EWS).

Key issues/challenges• Unfavourable land development policies

• Lack of sufficient capital at competitive rates

• High number of approvals and significant procedural delays

• Lack of access to formal credit to masses

• Ambiguous taxation regime and multiplicity of taxes

• Shortage of skilled and unskilled workforce

• Significant supply demand mismatch.

NDA stanceBJP in its election manifesto has given top priority to the housing sector, and aims to bridge the housingshortage gap through its vision, Housing For All, by 2022. Further, it was proposed to develop100 smartcities, which were to be enabled via latest technology and infrastructure. Additionally, it was alsoproposed to rationalise the tax regime, and to liberalise the FDI in select sectors.

What was expected• Direct tax

– Clarity on taxability of joint development agreement transactions

– Deletion of stamp duty valuation-based taxation

– Increased deduction of interest on home loans

– Profit-linked deduction for affordable housing and slum rehabilitation– Re-introduction of Minimum Alternate Tax (MAT) exemption granted to SEZs.

Context




• Indirect tax– Credit of input service tax paid on construction services

– Non levy of service tax on transfer of ‘development rights’

– Availability of cenvat credit to the developer, irrespective of end use

– Benefit for abetment from levy of service tax on prime location charges, etc.

– Exemption from ‘Point of Taxation Rules, 2011 to real estate.

• Improving liquidity– Relax FDI norms

– Allow external commercial borrowings

– Grant infrastructure status.




Key announcementsMajor policies announcements• INR7,060 crore provided in 2014-15 for development of 100 smart cities• National Housing Bank allocated INR8,000 crore and INR4,000 crore to support rural housing and

urban affordable housing respectively• Built-up area and minimum capitalisation requirements for FDI in the real estate sector proposed to

be reduced from 50,000 sq meters to 20,000 sq meters, and from USD10 million to USD5 millionrespectively, with a three year post completion lock in

• To promote FDI in affordable housing, projects committing at least 30 per cent of the total projectcost for affordable housing to be exempted from minimum built-up area and capitalisationrequirements, with the condition of three year lock-in

• Regulatory framework to be set up for REITs and InvITs shortly, to improve liquidity in the realestate and infrastructure sector

• Slum development included in the list of corporate social responsibility activities• Effective steps to revive SEZs• INR100 crore allocated for setting up the National Industrial Corridor Authority, along with

expediting master planning of several industrial corridor and smart cities.

Key amendments to the Income-tax Act 1961• Deduction of home loan interest on self-occupied property, and home loan repayment increased

from INR1,50,000 to INR2,00,000.

• Pass-through taxation regime for REIT (Real Estate Investment Trust) and InvIT (InfrastructureInvestment Trust) (together defined as ‘business trust’) as under:

– Interest received/receivable from a Special Purpose Vehicle (SPV) (defined as Indiancompany) to be exempted in business trust, and taxed in the hands of unit holders; nowithholding tax to be levied on the SPV on interest paid to a business trust

– Business trust to withhold tax at 5 per cent (for non-residents) and 10 per cent (for residents)on interest income distributed to the unit holders

– SPV paying dividend liable to Dividend Distribution Tax (DDT), and hence such dividend to beexempt in the hands of the business trust, and its onward distribution to unit holders

– Any other income of the business trust taxable in its hands at maximum marginal rate, andexempt in the hands of unit holders

– Long term capital gains on sale of units (listed) of business trust shall be exempt, and short term capital gains thereon shall be taxed at a concessional rate of 15 per cent (plus applicablesurcharge and cess) in the hands of unit holders; these exemptions would however not apply tounits received in exchange of shares of the SPV

– The units of the business trust would become ‘long term capital asset’ after 36 months (and not12 months) of holding, due to a separate amendment proposed

– Exchange of shares of SPV for units of the business trust (on transferring by the sponsor into the business trust) shall not be taxable as capital gains; cost and period of holding of theshares of the SPV to be considered/included in computing the capital gains on subsequent transfer of units

– Interest on External Commercial Borrowings (ECB) by the business trust proposed to be taxedin the hands of the non-resident at the rate of 5 per cent, and subjected to withholding taxaccordingly.

Profit from the activities of affordable housing and slum rehabilitation projects proposed to becharged to Alternate Minimum Tax (AMT) in non-company assesses.

Key policy/fiscal/tax proposals




Key amendments to service tax law

• Service tax would be applicable on 70 per cent of the total amount charged for the contract, incase of all works contracts other than contracts qualifying as ‘original works’ (effective from 01October 2014). Earlier, activities for completion and finishing such as glazing, plastering, floor andwall tiling, installation of electrical fittings of an immovable property, were liable to service tax on60 per cent of the total amount charged for the contract.

• Cenvat credit on inputs and input services should not be taken after a period of six months from thedate of issue of invoice, bill, or challan (effective from 01 September 2014).

ImpactThe Finance Minister has helped by taking a holistic view of the sector by addressing the concernsrelating to liquidity, demand and supply, affordability and slum rehabilitation, well-planned modernisedcities, revival of SEZs, mobilisation of mass savings into the sector with appropriate fiscal incentives,and driving industrialisation; thereby laying the path for real estate development.

These reformative announcements, along with appropriate and timely follow up measures by otherministries/governmental agencies, can provide the much required impetus to this ailing sector, and putit back on its growth trajectory, thus boosting the overall economic performance of the country.

Though the budget did not meet all expectations, it has given prime importance to the sector, thus givinga message for the revival of the economic growth. Also, considering the tenure available with the newgovernment and the prevailing economic situation, we believe there was little room for large populistmeasures.




Unfinished agenda

What remainsWhile a lot has been provided for the sector, with a promise to bring in further reforms anddevelopmental policies, the following key areas need to be addressed:

• Much has been spoken and done for development of affordable housing in the country; however,an important aspect that seems to have been missing all eyes, is the profit-link tax breaks foraffordable housing and slum rehabilitation, as against the existing capital-linked deduction. This isfor the reason that land and construction costs are fully deductible for real estate developers asrevenue expenditure in any case, and there being no major capital expenditure, there is hardly anybenefit actually accruing out of the current tax incentive. The profit-linked deduction on the otherhand can go to reduce the tax costs and provide improved margins to developers, thus revivingbusiness interest in these areas. MAT/ AMT tax on these developers could also act as a deterrent.

• The Finance Minister mentioned the government’s commitment to revive SEZs. However, one theof important factors for the lull in SEZ development/occupancy is the introduction of MinimumAlternate Tax on SEZ developers and units; which has not been addressed. It is thereforeimportant that while the roadmap for the revival of SEZ is drawn, this important piece of fiscalincentive is considered and dealt with, since it is a major cost factor that hinders the SEZ activities.

• The fiscal provisions for REIT and InvIT are welcome; however the formalisation of regulatoryframework for these investment pooling vehicles need to be expedited, as without suchframework, such vehicles cannot be created and the fiscal provisions would thus be redundant.

• The REIT/InvITunits, though listed, would constitute ‘long term capital asset’ after a holding of 36months (and not 12 months). This may act as a deterrent for investments in REIT and InvIT. It seems this is unintended and needs to be appropriately amended.

• Opening up of the ECB route fully for the real estate sector (as against the current allowance foronly affordable housing and slum rehabilitation projects) is another major area which has not beenaddressed. While FDI can provide the much required liquidity into the sector overall, ECB canprovide low source funding to Indian developers and ease the liquidity pressure.

• The other important aspect that requires consideration is the granting of ‘industry’ status to thesector, which would provide it easy access to the bank funding at better interest rates andreduced collateral values.

• The increase in the limit of home loan interest deduction is helpful and provides some additionaldisposable income in the hands of home-owners. However, the extent of increase of INR50,000 is

not commensurate to the inflation, and property price rise witnessed over the last several yearsduring which the existing interest deduction of INR150,000 has been on the statute.

What is expected going forwardThe Union Budget 2014-15 has set the ball rolling for the real estate sector’s revival. The FinanceMinister has laid the path for real estate development and we can now expect some major reforms fromother ministries, especially the Ministry of Housing & Urban Poverty Alleviation and the Ministry ofUrban Development.

The sector can expect some major reforms which have been pending for long, such as setting up of thereal estate regulator, reforming the existing LARR Act, 2013, rolling out of REITs, faster execution ofNational Land Record Modernisation Programme (NLRMP), and introduction of a single window

clearance mechanism.




Thank You

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurate and

timely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (“KPMG International”), a

Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks ofKPMG International.

Contacts:

Dinesh KanabarDeputy CEO andChairman – Sales & MarketsT: +91 22 3090 1661E:[email protected]

Arvind MahajanPartner and HeadInfrastructure and Government ServicesT: +91 22 3090 1740E:[email protected]

Neeraj BansalPartner and HeadReal Estate and ConstructionT: +91 124 307 4000E:[email protected]

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RealEstate Construction PoV 2014