BUDGET 2012-2013

REAL ESTATE

Shweta KumariMBA(Gen.)

CONTRIBUTION BY REAL ESTATE • The 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 and increased debt servicing levels and with the declining rate of foreign direct investment in the real estate sector, the Union Budget 2012 was the only aspiring ray of hope for the sector to get back on track.

HIGHLIGHTS OF BUDGET• External Commercial Borrowing (‘ECB') doors

are proposed to be made open for specified low cost affordable housing projects which could potentially provide the much needed liquidity to the housing sector.

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

HIGHLIGHTS CONTD…• 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 investment in infrastructure – Fund

allocation for urban poor

HIGHLIGHTS CONTD…• Accommodation is 3,973,000 cr • JNNURM (Jawaharlal Nehru National

Urban Renewal Mission) allocation hiked by 87 per cent

• NHAI allocation up by 23 per cent• Hike infrastructure investment to over

9% of GDP by 2014

ANALYSIS OF BUDGET

• There is an absence of any intent to address the issues concerning the sector.

• High property prices and low demand coupled with tight lending scenario has further postponed the ambition of owning a house.

• Higher allocation for infrastructure and rural oriented scheme should have a positive cascading effect on the economy. Thankfully, residential leases have been kept out of the ambit of service tax.

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

• 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 1% tax rebate for home loans of upto Rs.15 lakh on homes costing upto Rs. 25 lakh will prove beneficial for developers in this segment.

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

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

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

CONCLUSION• Investment linked deduction available for low

cost affordable housing projects increased 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 capital expenditure 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 sigh of relief with the reinforcement of tax pass through status for all types of VCFs. By virtue of this amendment, the VCF making investment in a real estate SPV will not be subject to tax and the tax will be levied at the investor level.

• This amendment does away with the age old controversy surrounding taxation of trusts and will result in reduction of litigation.

• One of the major proposal which may have a huge impact to the real estate sector relates to the requirement of deduction of tax at source @ 1% on payment of consideration 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 developers selling their projects to innumerable buyers.

• 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.

THANK YOU