Budget hopes of the real estate and infrastructure sectors
February, 17th 2010
The global economic meltdown radically impacted the infrastructure and real-estate sectors, reminisces K. T. Chandy, Senior tax professional, Ernst & Young. The decline in demand, the supply excesses, and the high debt position of most Indian developers were some of the factors that contributed to the decline of the real-estate sector over the last two years, he adds, during a recent pre-Budget email interaction with Business Line.
The Budget should come up with measures that can offer the much-needed stimulus to the real estate and infrastructure sectors for sustaining broad-based and inclusive growth, Chandy argues.
Excerpts from the interview.
On the impact of stimulus packages
The fiscal stimulus packages introduced by the Government did help the sectors achieve greater liquidity level, but did little to improve retail demand. It is important that the sectors continue to receive Government support through tax policy, which will help the sectors move firmly towards the path of economic recovery.
Budget 2009 surprisingly had very few proposals that directly benefited the sector despite the fact that the global crisis was at its peak and the real estate and infrastructure sectors were more badly affected than most other sectors. The sectors are hopeful that this time around, the Finance Minister will be more responsive to the needs of the sector.
The re-introduction of direct and indirect tax incentives would go a long way in meeting the current challenges faced by these sectors.
On affordable housing
The resurgence of the affordable housing segment has resulted in a win-win situation for developers in terms of improving demand, for consumers in terms of affordable real-estate, and for the Government in terms of meeting its objectives of providing quality housing to the population at large.
Given that the margins derived from the affordable housing segment are lower than the mid to luxury segments, the Government would do well to re-introduce the tax holiday available for low-cost housing that had lapsed on March 31, 2008.
On sops for infrastructure projects
On the infrastructure front, presently, a tax holiday is available for profits from infrastructure projects such as roads, highways, water supply projects, ports, airports and so on. Budget 2010 should extend the scope of the tax holiday to include projects involving development of integrated townships, which we believe will certainly provide a fillip to such large developments.
Further, while several infrastructure projects are eligible for tax holidays, the same projects are liable to tax under the Minimum Alternate Tax (MAT) provisions. This besides being inequitable has an adverse impact on cash-flows.
It would be a welcome relief, therefore, if such infrastructure projects were exempted both from normal corporate tax provisions and the MAT provisions in accordance with the spirit of the policy to exempt projects with long gestation periods.
On service tax woes
The abolition of service tax on commercial real estate would also be welcome relief to the real-estate sector and for consumers of such real estate. Currently there exists quite some uncertainty on whether the levy is applicable given judicial precedent on this issue. While the tax office seems to be enforcing the collection of such service tax on rentals, a legislative amendment doing away with the levy would help significantly reduce litigation on this matter.
On other policy measures
To improve liquidity and as a matter of policy, the Government may consider broad-basing the external commercial borrowing (ECB) regulations to include other eligible real estate borrowers to tap overseas debt opportunities besides integrated townships, which is currently permitted. This would help the infrastructure/ real estate community invest into new projects and would give the sector sufficient time to repay the loans.
Also on the policy front, it would help if Press Note 2 of 2005 is suitably relaxed to factor in the economic circumstances that have been faced by the real estate sector over the last few years. For example, a clear process could be formulated for a foreign investor to exit investments, which do not appear to have current economic potential.