Real estate and

Construction
Post-budget sectoral
point of view
INDIA UNION BUDGET 2014
Table of contents
1. Context
2. Key policy/fiscal/tax proposals
3. Unfinished agenda
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Where are we
Contribution to GDP: According to the Economic Survey 2013-14, the real estate and ownership of
dwellings contributed to 5.9 per cent of Indias GDP, registering a growth of 5.6 per cent in 2012-13.
Real estate in particular, grew by 26.1 per cent
Contributor to employment creation: The real estate and construction sector is the second largest
employer generator in India after agriculture
Share in FDI: The FDI inflow fell 8 per cent in 2013-14 to USD1.2 billion, accounting for about 5 per
cent of the total FDI inflow
Rising prices: As per the National Housing Bank (NHB) Residex index, the housing prices in major
cities have skyrocketed between 2007 and 2014. During this period, 24 cities witnessed an increase
in housing prices, with the maximum increase in Chennai (249 per cent), followed by Pune (132 per
cent), Mumbai (129 per cent), and Bhopal (126 per cent)
Housing credit: Institutional credit for housing investment has grown impressively at a CAGR of
about 18-20 per cent per annum, with mortgages as a percentage of GDP rising from 3.4 per cent in
2001 to 9 per cent in 2012-13. However, it is still well below countries like China, Thailand, and
Malaysia
Significant supply gap: As per a planning commission report published in 2012, India faces a
housing shortage of about 1.9 crore in urban areas, and about 4 crore in rural areas, taking the
total housing shortage in India to about 6 crore. More than 95 per cent of this housing shortage
belongs to the urban and rural poor i.e. Lower Income Group (LIG) and Economically Backward
Section (EWS).
Key issues/challenges
Unfavourable land development policies
Lack of sufficient capital at competitive rates
High number of approvals and significant procedural delays
Lack of access to formal credit to masses
Ambiguous taxation regime and multiplicity of taxes
Shortage of skilled and unskilled workforce
Significant supply demand mismatch.
NDA stance
BJP in its election manifesto has given top priority to the housing sector, and aims to bridge the housing
shortage gap through its vision, Housing For All, by 2022. Further, it was proposed to develop100 smart
cities, which were to be enabled via latest technology and infrastructure. Additionally, it was also
proposed to rationalise the tax regime, and to liberalise the FDI in select sectors.
What was expected
Direct tax
Clarity on taxability of joint development agreement transactions
Deletion of stamp duty valuation-based taxation
Increased deduction of interest on home loans
Profit-linked deduction for affordable housing and slum rehabilitation
Re-introduction of Minimum Alternate Tax (MAT) exemption granted to SEZs.
Context
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Indirect tax
Credit of input service tax paid on construction services
Non levy of service tax on transfer of development rights
Availability of cenvat credit to the developer, irrespective of end use
Benefit for abetment from levy of service tax on prime location charges, etc.
Exemption from Point of Taxation Rules, 2011 to real estate.
Improving liquidity
Relax FDI norms
Allow external commercial borrowings
Grant infrastructure status.
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Key announcements
Major policies announcements
INR7,060 crore provided in 2014-15 for development of 100 smart cities
National Housing Bank allocated INR8,000 crore and INR4,000 crore to support rural housing and
urban affordable housing respectively
Built-up area and minimum capitalisation requirements for FDI in the real estate sector proposed to
be reduced from 50,000 sq meters to 20,000 sq meters, and from USD10 million to USD5 million
respectively, with a three year post completion lock in
To promote FDI in affordable housing, projects committing at least 30 per cent of the total project
cost for affordable housing to be exempted from minimum built-up area and capitalisation
requirements, with the condition of three year lock-in
Regulatory framework to be set up for REITs and InvITs shortly, to improve liquidity in the real
estate and infrastructure sector
Slum development included in the list of corporate social responsibility activities
Effective steps to revive SEZs
INR100 crore allocated for setting up the National Industrial Corridor Authority, along with
expediting master planning of several industrial corridor and smart cities.
Key amendments to the Income-tax Act, 1961
Deduction of home loan interest on self-occupied property, and home loan repayment increased
from INR1,50,000 to INR2,00,000.
Pass-through taxation regime for REIT (Real Estate Investment Trust) and InvIT (Infrastructure
Investment Trust) (together defined as business trust) as under:
Interest received/receivable from a Special Purpose Vehicle (SPV) (defined as Indian
company) to be exempted in business trust, and taxed in the hands of unit holders; no
withholding tax to be levied on the SPV on interest paid to a business trust
Business trust to withhold tax at 5 per cent (for non-residents) and 10 per cent (for residents)
on interest income distributed to the unit holders
SPV paying dividend liable to Dividend Distribution Tax (DDT), and hence such dividend to be
exempt in the hands of the business trust, and its onward distribution to unit holders
Any other income of the business trust taxable in its hands at maximum marginal rate, and
exempt in the hands of unit holders
Long term capital gains on sale of units (listed) of business trust shall be exempt, and short
term capital gains thereon shall be taxed at a concessional rate of 15 per cent (plus applicable
surcharge and cess) in the hands of unit holders; these exemptions would however not apply to
units received in exchange of shares of the SPV
The units of the business trust would become long term capital asset after 36 months (and not
12 months) of holding, due to a separate amendment proposed
Exchange of shares of SPV for units of the business trust (on transferring by the sponsor into
the business trust) shall not be taxable as capital gains; cost and period of holding of the
shares of the SPV to be considered/included in computing the capital gains on subsequent
transfer of units
Interest on External Commercial Borrowings (ECB) by the business trust proposed to be taxed
in the hands of the non-resident at the rate of 5 per cent, and subjected to withholding tax
accordingly.
Profit from the activities of affordable housing and slum rehabilitation projects proposed to be
charged to Alternate Minimum Tax (AMT) in non-company assesses.
Key policy/fiscal/tax proposals
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Key amendments to service tax law
Service tax would be applicable on 70 per cent of the total amount charged for the contract, in
case of all works contracts other than contracts qualifying as original works (effective from 01
October 2014). Earlier, activities for completion and finishing such as glazing, plastering, floor and
wall tiling, installation of electrical fittings of an immovable property, were liable to service tax on
60 per cent of the total amount charged for the contract.
Cenvat credit on inputs and input services should not be taken after a period of six months from the
date of issue of invoice, bill, or challan (effective from 01 September 2014).
Impact
The Finance Minister has helped by taking a holistic view of the sector by addressing the concerns
relating to liquidity, demand and supply, affordability and slum rehabilitation, well-planned modernised
cities, revival of SEZs, mobilisation of mass savings into the sector with appropriate fiscal incentives,
and driving industrialisation; thereby laying the path for real estate development.
These reformative announcements, along with appropriate and timely follow up measures by other
ministries/governmental agencies, can provide the much required impetus to this ailing sector, and put
it back on its growth trajectory, thus boosting the overall economic performance of the country.
Though the budget did not meet all expectations, it has given prime importance to the sector, thus giving
a message for the revival of the economic growth. Also, considering the tenure available with the new
government and the prevailing economic situation, we believe there was little room for large populist
measures.
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Unfinished agenda
What remains
While a lot has been provided for the sector, with a promise to bring in further reforms and
developmental policies, the following key areas need to be addressed:
Much has been spoken and done for development of affordable housing in the country; however,
an important aspect that seems to have been missing all eyes, is the profit-link tax breaks for
affordable housing and slum rehabilitation, as against the existing capital-linked deduction. This is
for the reason that land and construction costs are fully deductible for real estate developers as
revenue expenditure in any case, and there being no major capital expenditure, there is hardly any
benefit actually accruing out of the current tax incentive. The profit-linked deduction on the other
hand can go to reduce the tax costs and provide improved margins to developers, thus reviving
business interest in these areas. MAT/ AMT tax on these developers could also act as a deterrent.
The Finance Minister mentioned the governments commitment to revive SEZs. However, one the
of important factors for the lull in SEZ development/occupancy is the introduction of Minimum
Alternate Tax on SEZ developers and units; which has not been addressed. It is therefore
important that while the roadmap for the revival of SEZ is drawn, this important piece of fiscal
incentive is considered and dealt with, since it is a major cost factor that hinders the SEZ activities.
The fiscal provisions for REIT and InvIT are welcome; however the formalisation of regulatory
framework for these investment pooling vehicles need to be expedited, as without such
framework, such vehicles cannot be created and the fiscal provisions would thus be redundant.
The REIT/InvIT units, though listed, would constitute long term capital asset after a holding of 36
months (and not 12 months). This may act as a deterrent for investments in REIT and InvIT. It seems
this is unintended and needs to be appropriately amended.
Opening up of the ECB route fully for the real estate sector (as against the current allowance for
only affordable housing and slum rehabilitation projects) is another major area which has not been
addressed. While FDI can provide the much required liquidity into the sector overall, ECB can
provide low source funding to Indian developers and ease the liquidity pressure.
The other important aspect that requires consideration is the granting of industry status to the
sector, which would provide it easy access to the bank funding at better interest rates and
reduced collateral values.
The increase in the limit of home loan interest deduction is helpful and provides some additional
disposable income in the hands of home-owners. However, the extent of increase of INR50,000 is
not commensurate to the inflation, and property price rise witnessed over the last several years
during which the existing interest deduction of INR150,000 has been on the statute.
What is expected going forward
The Union Budget 2014-15 has set the ball rolling for the real estate sectors revival. The Finance
Minister has laid the path for real estate development and we can now expect some major reforms from
other ministries, especially the Ministry of Housing & Urban Poverty Alleviation and the Ministry of
Urban Development.
The sector can expect some major reforms which have been pending for long, such as setting up of the
real estate regulator, reforming the existing LARR Act, 2013, rolling out of REITs, faster execution of
National Land Record Modernisation Programme (NLRMP), and introduction of a single window
clearance mechanism.
2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
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Thank You
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavour to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (KPMG International), a
Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of
KPMG International.
Contacts:
Dinesh Kanabar
Deputy CEO and
Chairman Sales & Markets
T: +91 22 3090 1661
E: dkanabar@kpmg.com
Arvind Mahajan
Partner and Head
Infrastructure and Government Services
T: +91 22 3090 1740
E: arvindmahajan@kpmg.com
Neeraj Bansal
Partner and Head
Real Estate and Construction
T: +91 124 307 4000
E: nbansal@kpmg.com