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Union Budget 2017: Announcements in Real Estate sector
Overview
The Indian Real Estate sector had set high expectations from Union Budget
2017. Burdened with high inventories and low liquidity in the Indian market post
demonetization, the struggling real estate sector needed a boost from the Government.
While the budget doesn’t address all the demands of the sector, the affordable housing
segment has received a big booster dose with significant announcements on both the
tax and policy front. On the flip side, there are some unexpected surprises and unmet
expectations that Union Budget 2017 brings with it.
Key announcements
Policy announcements
Affordable housing gets a status elevation with the ‘infrastructure sector’ tag,
enabling developers operating in this segment to raise funds at a cost which would
be cheaper and equivalent to other infrastructure projects. Banks and financial
institutions should now be forthcoming to lend to such projects as it now assumes
‘priority sector lending’ categorization.
Refinancing of home loans by the National Housing Bank should result in liquidity
creation and lowering cost of funding, and if the benefits trickle down home buyers
will benefit at large.
Direct tax
Rationalization of tax holiday provisions for Affordable Housing Projects:
The tax holiday provisions which were introduced last year for providing impetus to
affordable housing projects, have been amended as follows:
Size of residential unit to be measured in ‘carpet area’ as defined in Real Estate
(Regulation and Development) Act, 2016 and not in ‘built up area’, which implies
that the size of the eligible unit is relaxed by around 30 percent.
Restriction of 30 square meters to apply only where project is located within the
municipal limits of the Chennai, Delhi, Kolkata or Mumbai.
Timeline for completing the project to be eligible for the deduction increased to
5 years from 3 years.
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General amendments
GAAR
International Tax Amendments
Transfer pricing
Customs and excise
Service tax
Central sales tax
GST
Manoj N Kumar
+91 80 6642 0030
Prashanth Bhat
+91 80 6642 0194
Extension of period for concessional tax rate on borrowings from non-residents
A concessional withholding tax rate of 5 percent, which is also the final tax, is
provided under section 194LC of the Income-tax Act, 1961 (‘ITA’) on interest
payable on external commercial borrowings provided that the borrowing was made
on or before July 1, 2017. This window is proposed to be extended by 3 years ie to
July 1, 2020. Further, the scope of this section is extended to rupee denominated
bonds issued to non-residents before July 1, 2020, with retrospective effect from
April 1, 2016.
Similarly, the benefit of lower withholding rate of 5 percent on bonds under section
194LD of the ITA is proposed to be extended to interest payments made up to
July 1, 2020.
To make the transfer of rupee denominated bonds between non-residents tax free,
a new section has been introduced to provide that such transactions would not be
regarded as a ‘transfer’ under the ITA.
Limitation of interest payments to Associated Enterprise (‘AE‘)
As a fallout of the BEPS action plan, thin capitalisation measures are sought to be
introduced with section 94B. The section provides that amounts payable by an
Indian company or a permanent establishment of a foreign company in excess of
INR 10 mn as interest or similar consideration, on account of any loan obtained
from an AE, is to be limited to 30 percent of the earnings before interest, taxes,
depreciation and amortization. This sections also extends to interest payments on
loan which have been taken from an unrelated party but guaranteed by an AE.
However, carry forward provisions have also been proposed which shall allow for
carry forward of disallowed interest expense to 8 assessment years immediately
succeeding the assessment year for which the disallowance was first made.
Relaxations in transfer pricing compliance provisions in respect of Specified Domestic
Transactions (‘SDT’)
Scope of the existing provisions for domestic transfer pricing compliance are
proposed to be amended to remove from its ambit transactions which do not involve
any payments to a tax holiday unit or a unit enjoying a profit linked tax incentive
(section 10AA, section 80-IA). In addition to reducing the compliance burden, this
amendment takes away the difficulties arising out of a correlative adjustment. This
amendment is applicable from financial year 2017-18.
New section for computation of capital gains on Joint Development Agreements (‘JDA’)
Taxation of transactions involving JDA were prone to litigation. To provide clarity on
this, a new provision is proposed to be inserted under section 45 of the ITA
(charging section for capital gain) to clarify that the year of transfer in the case of a
JDA is the year in which the certificate of completion for the whole or part of the
project is received from the competent authority. This provision is applicable only to
individual or Hindu Undivided Families (HUFs).
Gautham Lokande
+91 80 4032 0130
Vaibhavkumar Rai
+91 80 6642 0015
Alok Chandna
+91 80 6642 0174
The sum total of the stamp duty value of the land-owner’s entitlement in the project
and monetary consideration, if any, received under the JDA shall be the full value of
consideration for such transfer.
Also, a new withholding tax section is proposed to be inserted to provide for
withholding tax on the payment of any monetary consideration under the JDA at the
rate of 10 percent.
Relaxation for computing capital gains on capital asset acquired before April 1, 2001
In computing capital gains on the transfer of a long term capital asset including any
immovable property acquired before April 1, 2001, the taxpayer is entitled to
consider the higher of the fair market value of such capital asset as on April 1, 2001
instead of the actual cost of acquisition.
Period of holding of immovable property for long term capital gains
The holding period for any immovable property (defined to mean land or building or
both) for it to be regarded as a long term capital asset has been reduced from 36
months to 24 months.
Conversion of convertible preference shares into equity shares not regarded as
‘transfer’:
Conversion of preference shares into equity shares is proposed to be excluded from
the purview of ‘transfer’. While the change clears a long standing issue, the
prospective effect could trigger questioning of past conversions.
Transfer of shares below fair market value
In case of transfer of unlisted shares of an Indian company, a new provision has
been introduced to treat the difference between the fair market value and the sale
price as the income of the transferor. Rules to compute ‘fair market value’ for this
purpose are to be notified separately.
Set-off of loss under Income from House Property
Provisions relating to inter-head set-off of loss have been amended to restrict the
overall set-off of loss from the head ‘Income from House property’ in a particular
year to INR 0.2 mn. Under the current provisions, loss under the head property
(mainly arising on account of interest on home loans on let-out properties) can be
set-off in full against income from any of the other head of income.
Notional income on unsold inventory / property held as stock in trade
New sub-section has been proposed to provide that notional income under section
22 of the ITA would not apply on the unsold stock of units / properties held as stock
in trade for a period of one year from the end of the financial year in which the
certificate of completion of construction of the property is received from the
competent authority. Implicitly, notional rent from unsold inventory held beyond the
period of one year would be taxable in the hands of the developers. Also, this
provision which is intended to provide relief could actually trigger litigation in respect
of contrary positions taken in the past.
Expansion of list of bonds under section 54EC for claiming capital gain exemption
In order to widen the list of bonds, investment in which would exempt the capital
gains to the extent of INR 5 mn arising from transfer of a long term capital asset, an
amendment has been proposed to expand the list of bonds to include any bonds
redeemable after 3 years as may be notified by the Central Government.
Restriction on cash transactions
New section 269ST has been proposed to prohibit transactions exceeding INR 0.3
mn in cash. This restriction applies to any transaction where the aggregate amount
received from a person in a day or in respect of a single transaction or in respect of
transaction relating to one event or occasion from a person, where the limit is
breached. Any non-compliance with the aforesaid section would attract a penalty
which is proposed to be a sum equal to the amount of sum receipt.
Exemption on long term capital gains tax exemption
New proviso inserted in section 10(38) of the ITA to provide that exemption from tax
on long term capital gains on equity shares would not be available if such shares
were acquired off-market and where Securities Transaction Tax (‘STT’) was not
paid at the time of purchase. This category would cover equity shares acquired by
promoters, private equity investors in companies prior to their listing. However,
exceptions to be carved out to the STT condition to protect genuine cases like, IPO
/ FPO acquisitions, bonus and rights issue, acquisitions by way of Foreign Direct
Investments etc – A notification in respect of the carve outs is to be issued shortly.
Minimum Alternate Tax (‘MAT’) adjustments on account of Ind AS
Section 115JB of the ITA is proposed to be amended to adjust for the effect of
transition to and year on year accounting under Ind AS. The transition amount
(being the adjustment in other equity at the time of convergence / first time
adoption) is proposed to be adjusted against the book profits over five years at 1/5th
the transition amount every year.
Rationalization of provisions relating to tax credit for MAT
MAT credit can now be carried forward upto 15 assessment years (from the existing
period of 10 years) immediately succeeding the assessment year in which such tax
credit becomes allowable.
Indirect tax
Clarity on valuation of works contracts involving sale of land
In a bid to clear the ambiguities surrounding the valuation for the purpose of
computation of service tax, the Service Tax Valuation Rules have been amended
retrospectively with effect from July 1, 2010.
The service Tax (Determination of Value) Rules, 2006, has been amended to
specifically exclude the value of land or undivided share of land from the total
consideration charged by a builder / promoter of a project, to determine the value of
service portion in a composite contract which also involves sale of land.
In a case where the separate value of land or undivided share of land is not
available, it is proposed to levy service tax on the following abated values over
different periods of time from July 1, 2010:
Period Abatement
July 1, 2010 to June 30, 2012 25 percent of the total consideration including value
of land
July 1, 2012 to February 28,
2013
25 percent of the total consideration including value
of land
March 1, 2013 to May 7, 2013 Residential units having carpet area up to 2000 sqft
or consideration is less than INR 10 mn – 25
percent of the total consideration including value of
land
Any other case - 30 percent of the total
consideration including value of land
May 8, 2013 to March 31, 2016 Residential units having carpet area up to 2000 sqft
and consideration is less than INR 10 mn - 25
percent of the total consideration including value of
land
Any other case - 30 percent of the total
consideration including value of land
April 1, 2016 onwards 30 percent of the total consideration including value
of land
The above amendment seems to be an attempt to provide a legal basis for
calculating the taxable value for service tax in such cases, by specifically providing
for land value deduction.
Service tax exemption on long term lease by State Government
Service tax on one time upfront payments (called as premium, salami, cost, price,
development charges or by any other name) for long term leases (30 years or
more) of industrial plots to industrial units by State Government Industrial
Development Corporations / Undertakings was exempted with effect from
September 22, 2016 by way of a notification.
It has been proposed to extend the above exemption to long term leases of
industrial plots to industrial units retrospectively with effect from June 1, 2007.
Hence, in cases where service tax has already been discharged for the period prior
to September 22, 2016, the same would be available as refund on an application
filed within 6 months from the date of President’s assent to the Finance Bill, 2017.
Conclusion
As the sector is gearing up for new challenges with the onset of Goods and Services
Tax (‘GST’) and the Real Estate Regulation Act (‘RERA’), Union Budget 2017 seems to
have provided some respite and equally has sprung some negative surprises on the
industry. The overall intent of the proposals seem be to focussed on affordable
housing while bringing down real estate prices in general for the sector as a whole and
curbing unaccounted transactions, which is in sync with the theme of Union Budget
2017.
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