Impact of budget on construction and real estate sector

Sandesh Mundra & Associates Chartered Accountants

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304, Super Plaza, Sandesh Press Road, Vastrapur, Ahmedabad – 380015

Web: www.smaca.in email us at [email protected]

Impact of Union Budget 2017 on Construction & Real-estate Sector

Changes in Direct Taxes

Union Budget 2017-18 has focused a good deal on real estate and infrastructure sector. It was expected

that the Union Budget may target the current indirect taxes to align with the GST. However, looking at

the clauses proposed in the finance bill, it is clear that it has almost been a no show on indirect tax front.

May be a good breather for us to continue our focus on GST. The after effects of de-monetization continue

to be felt even now. With a view to heal the wounds, government thought of dole out some benefits by

way of critical direct tax changes as below :-

i. Incentives for Promoting investments in immovable property

Capital asset qualifies as a long-term capital asset when it is held for more than 36 months. To make

investments more attractive in Real-estate, the limit of 36 months has been reduced to 24 months for

capital asset being land or building or both. Now we can claim indexation benefits on our cost of

acquisition if the period of holding exceeds 24 months.

ii. Rationalization of Provisions of Section 80-IBA to promote Affordable Housing

Profits and gains derived from developing and building certain housing projects are eligible of 100%

deduction subject to some conditions. The conditions include the limit of 30 square meters for the

built-up area of residential unit in respect of project located in the Chennai, Delhi, Kolkata and Mumbai

or within 25 kms from the municipal limits of these 4 cities and the project to be completed within 3

years. In order to promote the development of affordable housing sector, the following relaxations are

provided:—

Size of residential unit measured by "carpet area" as defined in Real Estate (Regulation and Development) Act, 2016 and not the "built-up area" which will result in increasing the area by atleast 30-40%.

Restriction of 30 sq. mtr. on size of residential units shall not apply to place located within a distance of 25 kms from the municipal limits of the Chennai, Delhi, Kolkata or Mumbai.

Period of completion of project for claiming deduction under this section shall be increased from existing 3 years to 5 years.

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To summarize, new carpet area limits for claiming the deduction under this Provision

is:-

Location of the project Old build area limits

New Carpet area limits

Within Chennai, Delhi, Kolkata or

Mumbai 30 square meters 30 square meters

within 25 kms from the municipal

limits of above cities 30 square meters 60 square meters

If the project is located at any other place

60 square meters 60 square meters

iii. Special Provisions for computation of capital gains in case of joint development

agreements (JDA)

Problem: - Capital gain is chargeable to tax in the year in which transfer takes place except in

certain cases. 'Transfer' includes any arrangement where rights are handed over in execution of part

performance of contract. In such scenario, execution of JDA between owner of immovable property

and the developer triggers the capital gains tax liability in the hands of the owner in the year in

which the agreement is executed for developing the projects. There were many issues on the

interpretation of this section however, the Finance Ministry has now taken a stand on this issue. To

clarify on this issue and to reduce the hardship of paying tax in year of transfer, following

amendments are proposed:-

•Individual /HUF who enters into JDA, capital gains shall be chargeable to in year in which certificate of completion for the project is issued by the competent authority.

Establishing taxable event

•Stamp duty value of land owner’s share on the date of issuing of certificate of completion plus any monetary consideration received, if any, be the full value of consideration

Value of consideration

•To assessee who transfers the asset before the issue of completion certificate.•Tax @ 10% to be deductible on payments made in above transaction.

Exclusions from benefit and TDS




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The problem in this initiative is that it is restricted to individual/HUF. But this issue is

faced by all the assessee. Hence, it makes no sense to limit the benefit to

individual/HUF. It should be extended to all.

iv. Shifting base year from 1981 to 2001 for computation of capital gains

In case of long-term capital asset, indexation of cost of acquisition is done. If the asset is acquired

on or before 1.4.1981 then, the fair market value of that asset on 1.4.1981 is considered as cost of

acquisition and indexation is done accordingly. However, it is difficult to get Fair market value of

any asset as on 1.4.1981. Hence, the provisions are amended and the base year is shifted to 1.4.2001.

Now, for the assets acquired on or before 1.4.2001, the fair market value of 1.4.2001 is to be taken.

Further, indexation is done taking 1.4.1981 as the base year, the same has been revised as 1.4.2001.

v. Expanding the scope of long term bonds under 54EC

Investment in bonds issued by NHAI or REC is eligible for deduction, the scope of such deduction

has been extended to investment in any bond redeemable after 3 years which has been notified by

Central Government.

vi. Deferment of notional income for house property held as stock-in-trade

It is proposed to provide that where the house property held as stock-in-trade which is not let

during the whole or any part of the previous year, the annual value of such property or part of the

property, for the period upto 1 year from the end of the financial year in which the certificate of

completion of construction of the property is obtained from the competent authority, shall be taken

to be nil.

vii. Tax incentive for the development of capital of Andhra Pradesh

To provide relief to individual / HUF who was the owner of land as on June 2, 2014, and has transferred such land under the land pooling scheme notified under the provisions of Andhra Pradesh Capital Region Development Authority Act, 2014, it is proposed to insert a new clause (37A) in Sec. 10 to provide that in respect of said persons, capital gains arising from following transfer shall be exempt –




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Further amendment to Sec. 49 so as to provide that where reconstituted plot or land, received under land pooling scheme is transferred after the expiry of 2 years from the end of the financial year in which the possession of such plot or land was handed over to the said assessee, the cost of acquisition of such plot or land shall be deemed to be its stamp duty value on the last day of the second financial year after the end of financial year in which the possession of such asset was handed over to the assessee is proposed.

Capital asset being land or building or both, under land pooling scheme

Sale of Land Pooling Ownership certificate by the said persons received in lieu of land transferred

under the scheme.

Sale of reconstituted plot or land by said persons within 2 years from the end of the financial

year in which the possession of such plot or land was handed over to the said persons.




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Changes in Indirect Taxes

The major change undergone in the present Budget directly affecting the real estate or infrastructure

sector is change in the Service Tax (Determination of Value) Rules. Rule 2A is amended retrospectively

with effect from 01.07.2010 so as to make it clear that value of service portion in execution of works

contract involving transfer of goods and land or undivided share of land, shall not include value of

property in such land or undivided share of land. The amendment shall be applicable on enactment of

finance bill by the President.

The amendment is proposed to nullify the effect of the landmark judgement issued by Delhi High Court

in case of Suresh Kumar Bansal vs. Union of India & Ors wherein it was held that Rule 2A of Service Tax

(Determination of Value) Rules, 2006 shall not apply when the consideration for a composite works

contract includes the value of land and hence such contracts shall not be liable to service tax. Hon. High

Court had observed that the Rule 2A does not provide for exclusion of value of land, the mechanism for

deriving the value of service fails and hence no service tax shall be payable when the contract includes

value of land. The above judgement is relating to the period before 01.07.2012 i.e. pre introduction of

negative list and has created chaos among the various developers and builders for claiming the refunds.

It is apparent from the above stated amendment that the valuation in case of works contract shall have

the following options for discharging service tax,

either to pay service tax at full rate on the value pertaining to services i.e. on labour portion, or,

to pay service tax on 40% / 70% value of construction cost i.e. value including material and labour

but not the value of land, or,

to pay service tax on 30% value of gross value i.e. value including material, labour and land.

It can be noted that the provisions pertaining to CENVAT credit Rules have kept unchanged. Thus, the

developers and builder can claim credit on input services and capital goods subject to other CENVAT

credit provisions.

The other change proposed in the budget is relating to the exemption for service tax, leviable on one time

upfront amount (premium, salami, cost, price, development charge or by whatever name called) in

respect of taxable service provided or agreed to be provided by a State Government industrial

development corporation or undertaking to industrial units by way of grant of long term lease of thirty

years or more of industrial plots retrospectively from 01.06.2007 i.e. from the day when the renting of

immovable property services were subject to levy of service tax. The above amendment shall be with effect

from 02.02.2017. Earlier notification no. 41/2016-st was issued, exempting the value of above services

prospective from 22nd September, 2016. The above amendment shall provide the exemption for the

period from 01.06.2007 to 21.09.2016.




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Other expected changes not incorporated in the proposed budget :-

⇢ It was expected that the rate of service tax may increase from present 15% to 16% - 18%.

⇢ It was expected that a notification may be issued to retrospectively exempt the excise duty leviable

on RMC manufactured at site.

⇢ Remaining exemptions applicable to infrastructure sector were expected to be withdrawn.

To Conclude with……

Finance ministry has made honest attempts to favor real-estate industry at least as far as direct taxes are concerned. However on the indirect tax front they have gone back on their promise by introducing a retrospective amendment, although it was expected by everyone on a technical ground.

Written By:-

(CA Sandesh Mundra, Mr. Naimish Padhiar, Ms. Pooja Jajwani)

