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Budget 2014: REIT’s get tax pass-through status; FDI norms eased for real estate

10 July, 2014

In his maiden Union Budget, Finance Minister Arun Jaitley announced a number of positive measures for the real estate sector, be it easing the foreign direct investment (FDI) norms, clarity on taxation of real estate investment trusts (REIT) and boosting urban as well as rural housing.

The biggest move was the grant of pass-through status to Real Estate Investment Trust (REIT) from a taxation perspective. Although this was already expected, the clarity now sets the stage for more concrete alternative fundraising routes for real estate developers.

“Currently, all the commercial assets are being financed through banks. If REIT is made effective, it will go a long way in unlocking capital from domestic banks and making participation for foreign investors smooth,” said Arun Kumar, managing director, Casa Grande.

However, Navin Kumar, executive director, Milestone Capital Advisors, believes there should have been more clarity on REIT.

“It does not flesh out details on structure of taxation and there is no quantification of taxes, like the one announced for home loan tax exemption. Clarity on REIT has been pending for long and we have come back to the same situation,” he said.

In another significant move the government eased FDI norms for real estate by bringing down minimum development area to 20,000 sq metres from 50,000 sq metres and minimum capitalisation requirement for wholly owned subsidiaries to $5 million from $10 million. This would qualify more projects to attract FDI.

Moreover, projects with at least 30 per cent cost allocated to low-cost affordable housing projects are exempt from limitations of capitalisation, minimum area requirement and lock-ins.

“This will allow even smaller developers to access foreign money. Additionally, it will allow a fund manager to allocate his funds across a wider range of projects. This was long due and it will definitely lead to greater flow of capital in the market,” said Sunil Rohokale, CEO and managing director, ASK Group.

As promised in the government’s manifesto, the Budget proposed the creation of 100 smart cities across India and allocated Rs 7,060 crore for the same. In the wake of increasing immigration to cities in search of employment, 100 satellite cities will be developed. Experts believe it is a decade-long plan and will be a test of the implementation capacity of the government.

On the personal tax front, the Budget has increased the income tax deduction limits (which covers principal payment for housing loans) from Rs 1 lakh to Rs 1.5 lakh and increased the deduction limit on interest payment for housing loans from Rs 1.5 lakh to Rs 2 lakh.

Experts are divided on this. Some believe that it will give extra savings to people and that will lead to an increase in demand from some section of the society, whereas others believe that it is a populist measure and gets negated with other developments in the economy.

“If a person was thinking of buying a home of Rs 40 lakh, he can take his budget to up to Rs 45 lakh,” said ASK Group’s Rohokale.

Sandeep Wirkhare, chief executive officer, Essel Finance Loans Limited, differs: “Inflation has gone up so much that it will eat into the benefits offered by the government through tax concessions.”

Another measure which impacts the real estate sector is the inclusion of slum redevelopment as part of CSR spends. This would channel some funding for such projects and add in terms of urban development.

Besides these the government announced measures to support both urban and rural housing and said it is committed to the endeavour to have housing for all by 2022.

The FM has proposed to set up a Mission on Low Cost Affordable Housing which will be anchored in the National Housing Bank (NHB). Schemes will be evolved to incentivise the development of low-cost affordable housing. He proposes to allocate Rs 4,000 crore for NHB to increase the flow of cheaper credit for affordable housing to the urban poor/EWS/LIG segment.

He also proposes to increase allocations for NHB for credit to rural housing to Rs 8,000 crore in the current year.

Infra under limelight

The Budget speech also had major thrust on infrastructure and to that end it has allocated a total of Rs 37,880 crore towards the NHAI for the construction of highways. It plans to complete 8,500 km of national highways this year. Additionally, the government has eased borrowing norms for infrastructure projects.

“I feel the proposed move to provide exemptions to banks from CRR and SLR obligations by linking those to long-term infrastructure loans is a masterstroke and can prove to be a game-changer in the field of infrastructure financing. It will also help in mobilising funds through issue of infrastructure bonds. The proposed Infrastructure Investment Funds in the lines of Real Estate Investment Funds is another positive step,” said Hemant Kanoria, CMD, Srei Infrastructure Finance Limited.

The Budget also proposed creation of 20 industrial clusters and allocated Rs 5,000 crore for warehousing in rural areas.

While the real estate fraternity has given thumps up to the announcements made in the Budget, they reiterate their long-term demand for industry status, national level regulator and speedy approval through single window clearance. The Budget was also silent on MAT and DDT in SEZ.

(Edited by Joby Puthuparampil Johnson)


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Budget 2014: REIT’s get tax pass-through status; FDI norms eased for real estate

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