real estate(budget 2012)

7/31/2019 Real Estate(Budget 2012)

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Budget 2012: What's in it for the real estatesectorThe real estate sector has contributed only 5% of India's overall GDP this year as

compared to a contribution of 10.6% in FY 2010-11. With the lack of cheap credit andincreased debt servicing levels and with the declining rate of foreign direct investment inthe real estate sector, the Union Budget 2012 was the only aspiring ray of hope for the

sector to get back on track.

Some of the key highlights are:

External Commercial Borrowing (ECB') doors are proposed to be made open forspecified low cost affordable housing projects which could potentially provide the muchneeded liquidity to the housing sector.

Further, the interest to be paid on the ECB loan availed from the period July 2012 toJune 2015 by the real estate developer is proposed to be subjected to a lower rate ofdeduction of tax at source of 5% from the existing rate of 20%.

-One lakh dwelling units for paramilitary forces to be built

Interest subsidy for home loans up to Rs 1 lakh

Rs 2,000 cr for rural housing fund under National Housing Bank

Indira Awaas Yojna hiked by 63% to Rs 8,883 cr

Housing allocation hiked under Rajiv Awaas Yojana

Hiked public invetsment in infrastructure Fund allocation for urban poor

accommodation is 3,973,000 cr

JNNURM (Jawaharlal Nehru National Urban Renewal Mission) allocation hiked by 87per cent

NHAI allocation up by 23 per cent

Hike infrastructure investment to over 9% of GDP by 2014

ANALYSIS OF BUDGET IN REAL ESTATE

Overall this budget does not have much to look forward to. With reference to the realestate sector, there is an absence of any intent to address the issues concerning thesector. High property prices and low demand coupled with tight lending scenario hasfurther postponed the ambition of owning a house. Amongst other challenges for thesector, unprecedented rise in urbanization is a challenge as well as an opportunity;


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however, the lack of road map will prolong the problems of the urban centers. Mr.Pranab Mukherjee has said that, the residential segment has got some attention interms of fund allocation to rural housing and ECB window for affordable housingprojects. Higher allocation for infrastructure and rural oriented scheme should have apositive cascading effect on the economy. Thankfully, residential leases have been kept

out of the ambit of service tax."

Another lost opportunity by ourFinance Minister, who could have done significant lot todrive the consumer demand for real estate and turn the fortunes of the sector and inturn give a fillip to GDP growth in 2012-13.

Our reaction to UnionBudget 2012-13 is mixed at best. It seems fair to state that the

Indian real estate sector does not have much to cheer about.

To begin with, it is difficult to see the raising of the personal income tax exemption limit

from Rs 1.8 lakh to Rs. 2 lakh as anything more than tokenism. It is certainly not

relevant for the aspiring Indian middle-class home buyer. The expected exemption limit

of Rs. 3 lakh would have had some significance. That said, the 1% tax rebate for home

loans of upto Rs.15 lakh on homes costing upto Rs. 25 lakh will prove beneficial fordevelopers in this segment.

Exempting proceeds from the sale of a residential property from Capital Gains tax if

they are invested in equity or equipment of an SME definitely provides home owners

with more reinvestment options. Previously, the only route for exemption was purchase

of another property or tax saving bonds. At the same time, this move could also result in

a lowering of sales volumes on the secondary sale market.

The increase in the service tax rate from 10% to 12% will increase the cost of

production for developers, who are already reeling under high input costs. It follows that

this increased burden will be passed on to end users.

Allowing External Commercial Borrowing (ECB) for affordable housing is, without doubt,

an excellent move. It will ensure better capital availability for developers of low-cost

housing. This sector is typified by low margins, and it becomes attractive only if

developers are enabled to produce greater volumes. Better capital availability will help

in timely project execution, which will result in higher volumes.

The postponement of a firm decision on FDI in multi-brand retail came as a

disappointment. We seem to have missed yet another opportunity to boost the Indian

economy by ways of significant foreign capital inflows. On the other hand, the

increased spend on warehousing will certainly help the retail real estate sector, sincemore storage capabilities will help retailers to expand into more cities and towns.

Likewise, the measures to increase funding for highways and other infrastructure will

help put more territories on the real estate map.

While he mentioned that the objective of the budget was to create conditions for growthand to focus on domestic demand driven growth recovery, however he gave the realestate sector , which could have helped him meet these objectives, a miss.
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The real estate sector holds significant prominence as its contribution to the Indian GDPis bound to grow beyond 6%. Housing sector has linkages to more than 250 ancillaryindustries and employs more than 10% of our workforce. Having said that, industry,which is undergoing stress, was in immediate need of several concessions and support

measures on easing of liquidity, relaxation of high tax structures and policy stimuli tofacilitate a more congenial regulatory and development environment. High costs ofinflation and financing has choked demand and supply situation that is leading to asignificant demand glut and impacting the social living conditions especially in fastgrowing geographies.

Nonetheless, a positive step forwards has been to allow foreign debt funding inaffordable housing. Thankfully, which has been acknowledged by the government ashousing is as much a critical need as food and education, two areas where governmentis quite proactive otherwise.

By not rolling back the 1% interest subsidy government has again upheld the need forstate intervention in the affordable segment. Well it does miss the point of how inflationhas taken that slab from 10 lakhs to somewhere close to at least 50% higher than that.This also happens to be a segment which gets easily impacted by interest ratefluctuations. So a wider scope and a stronger support mechanism could have beenmuch appreciated.

Hike in indirect taxes will definitely impact the cost of delivery of real estate impactingoverall demand. Further, shifts in tax slabs are too small to influence incrementaldemand.

No other positive measure to lend higher vibrancy into this sector was introduced ormentioned by Mr.Pranab Mukherjee. Any step towards attracting more FDI into thesector through relaxation of investment and exit norms providing a conduciveenvironment for exits could have gone a long way in getting international interest backinto Indian realty.

CONCLUSION

Investment linked deduction available for low cost affordable housing projectsincreased from 100% to 150%. This amendment may provide a much needed fillip to

the affordable housing segment by way of getting a higher rate of deduction on capitalexpenditure though cost of land (which constitutes majority portion of cost) is excluded.

Venture Capital Funds (VCF') focussed on real estate sector can now breathe a sighof relief with the reinforcement of tax pass through status for all types of VCFs. By virtueof this amendment, the VCF making investment in a real estate SPV will not be subjectto tax and the tax will be levied at the investor level.
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This amendment does away with the age old controversy surrounding taxation of trustsand will result in reduction of litigation.

One of the major proposal which may have a huge impact to the real estate sectorrelates to the requirement of deduction of tax at source @ 1% on payment ofconsideration for purchase of an immovable property having value in excess of Rs. 25

lakhs (Rs. 50 lakhs for immovable property situated in specified urban areas).

This proposal may have an immediate cash flow impact for the real estate developersselling their projects to innumerable buyers. Also, this proposal may result in increasingthe compliances for the buyers in case the payments for the property are proposed tobe made in various instalments.

Increase in Service Tax rate from 10% to 12% coupled with increase in the excise duty

rate for inputs and materials used in the real estate sector may lead to an increase in

the property prices for the ultimate buyers. This may increase non-affordability of

properties in a market where pricing concerns have been prevailing since a while.

While the industry players were hoping for a strong regulatory and effective policyframework which would have helped in boosting the real estate sector, the UnionBudget 2012 falls short of expectations.

Hopefully, with increase in liquidity through availability of ECBs and availability of higherdeduction for affordable housing, the real estate sector may get some respite from anotherwise stagnant growth pattern.

real estate(budget 2012)

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