Tuesday, 3 March 2015

Raising exemption limit on loans is key

To enhance affordability of residential units for homebuyers, the Budget should increase the limit for interest deduction on housing loan and liberalise the multiple taxation regime.

The Budget is important from the point of view of expectations of the stakeholders as well as key commercial decisions for the upcoming year as both are dependent on budget announcements. Here are some expectations of developers and homebuyers from this year’s Budget both from a tax and regulatory perspective.

Affordability has been a serious concern for home-buyers. Some of their expectations from the Budget include: The present limit for interest deduction for a housing loan should be increased Payment for purchase of first house up to a certain limit should be allowed as deduction for a period of three to five years Interest rate for buyers should be reduced to enable them to afford the cost of a house; The multiple levy of taxation should be eliminated to reduce overall cost of a house.

The liberalisation of taxation and regulatory regime as highlighted above can provide the much-needed boost to the sector as well as help the government to achieve its vision of Housing for All by 2022.

With liquidity crunch prevailing due to slow moving sales, developers are facing challenges like high interest and construction cost, unexpected amendments in state regulations, etc. The wishlist of developers, interalia, includes the following:

From a funding perspective: In Budget- 2014 a favorable tax framework was introduced for REITs. On a macro basis, REITs have been granted a pass-through status (ie one level taxation). Though the announcements were made to make REIT attractive from an income tax perspective, following areas need serious consideration: Levy of dividend distribution tax (‘DDT’) on dividend by project special purpose vehicle (‘SPV’s’) to REIT No capital gains exemption to a sponsor on contribution of immoveable property and deferred taxability on exchange of shares of SPV with REIT units No stamp duty exemption on contribution of assets by sponsor External Commercial Borrowings norms should be liberalised irrespective of the size of the project, to enable the real estate sector to raise funds at a cheaper rate which would address the liquidity crunch.

From the direct tax perspective: In the present scheme of taxation, no tax incentives are provided to developers.

Some of the key concern areas and expectations are:

Profit-linked incentive was available under Section 80-IB of the Income-tax Act, 1961 (‘the Act’) which was replaced with investment linked incentives under Section 35AD of the Act. However, the latter is available only to affordable housing and the SRA segment. Considering the slowdown, re-introduction of profit-linked incentive would enable growth of the sector.

Stamp duty-based deemed taxation under Sections 50C and 43CA of the Act create bottlenecks for genuine transactions where market value of immovable property is lower than the stamp duty rate. The provisions should be amended to exempt genuine transactions.

Developers focusing on the Special Economic Zone (‘SEZ’) segment have taken a backseat post introduction of DDT and MAT in the Finance Act, 2011. In the recent past, some of the developers have started exiting the SEZ segment either by denotifying or by share deal. It is critical to re-introduce MAT and DDT exemption for SEZ developers to revive the SEZ space.

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