Top 5 announcements of Budget 2012 for Indian Real Estate Sector
The union budget 2012 is out and was received with mixed emotions by the real estate industry. While the industry players were hoping for a strong regulatory and effective policy framework which would have helped in boosting the real estate sector, the budget falls short of expectations. Here’s what will affect the real estate sector.
1. ECB norms for affordable housing: The budget has taken into account the crying need to focus on affordable housing by allowing external commercial borrowing (ECB) for low cost housing, roads, and construction. Withholding tax on ECB for affordable housing has been reduced from 20 percent to five percent for three years. This will help ease the liquidity situation in the sector.
2. Service & Excise Increase: 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.
3. Pass through status for VCF: 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.
4. A 1% TDS: One of the major proposals 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. Also, this proposal may result in increasing the compliances for the buyers in case the payments for the property are proposed to be made in various instalments.
5. Capital Gains can be invested outside real estate: The exemption of proceeds from the sale of a residential property from capital gains tax if it is invested in equity or equipment of an SME. 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. Although it gives the home buyer more reinvestment options, it could result in cash flowing out from real estate.