At a glance, the Budget appears to offer goodies for the real estate sector with several announcements to boost affordable housing. However, the fine print seems to suggest some fairly problematic areas.
On the positive side, the grant of ‘infrastructure sector status’, though limited only to the affordable housing segment, will be seen as a big relief. The status tag will allow developers access to relatively more as well as cheaper capital from banks and financial institutions. Adding to this is the extended window for the 5 per cent tax rate on interest on masala bonds, which should encourage foreign debt funding for such projects.
With the scope of the tax holiday provisions for such projects being rationalised by amending the dwelling-unit size and project completion time, affordable housing segment appears to be a hands-down winner. Continuing from the Government’s demonetisation drive, the Finance Minister has proposed a number of changes to curb unaccounted transactions in real estate.
Penalties for cash dealings exceeding ₹3 lakh and extending tax withholding obligations on rent payments to individuals are some of them. The proposal to reduce the holding period of immovable properties from three to two years for getting the long-term capital gains tax rate benefit should incentivise property investors. Another key change is the introduction of thin capitalisation norms, which limit the interest deduction on corporates borrowing funds from overseas associated enterprises to 30 per cent of operating profit.
This will have significant impact on transaction structuring and deal negotiations involving non-resident investors. The amendment intended to provide relief to developers on the issue of notional rent on unsold stock of units is proposed to be introduced with a prospective effect, raising question marks on the past positions.
Further, requiring developers to pay tax on unsold inventory on the basis of notional rent, would also be an avoidable burden especially during a period of acute distress. The clarity provided on taxation of joint development agreements is welcome but again raises question marks on treatment of past transactions.
Taxpayers are now eligible to offset the full loss under the head ‘income from house property’ (usually on interest deduction arising from rented out properties) against other heads of income. The Budget now seeks to limit the set-off of loss to a maximum of ₹2,00,000. This will result in potential demand destruction for second home buyers.
With the Budget being done and dusted with, the focus of the industry would now move towards the other big game-changers in the form of GST on the tax front and Real Estate Regulatory Authority on the regulatory front. From a business perspective, the industry would now hope for a sharp fall in rates to kickstart demand on the residential side.
Author: Kalpesh Maroo, is Partner, Direct Tax, BMR & Associates LLP. With inputs from Gautham Lokande and Vivek M M
Credits The Hindu Business Line