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Reuters Photo Credit: Arun Jaitley

Realty funds cheer clarity on tax pass-through status, REITs; developers disappointed

28 February, 2015

Finance Minister Arun Jaitley drew applause from real estate private equity community for clarifying two key taxation issues relating to real estate investment trust (REIT) and tax pass-through status to realty funds besides doing away with the distinction between foreign direct investment (FDI) and foreign portfolio investment (FPI). But the property developers, who were waiting for sops on low-cost housing, were left with a no-show.

Realty PE

The top-most demand of the real estate stakeholders was clarity on REITs and the FM promised to rationalise capital gains tax regime for sponsors of REITs. Additionally, the budget has accorded pass-through status on rental income of REITs, much to the relief of the fraternity. However, the details are missing.

“Ideally, we would have liked the government to issue clarification on DTT as well but the announcements on CGT and pass-through status is good enough to kick-start the process,” said Sunil Rohokale, chief executive officer, ASK Group, which runs realty PE funds.

Anuj Puri, chairman & country head, realty consulting firm JLL India, pointed out that the FM has proposed to rationalise the capital gains regime for REITs, but has not given any specifics. “This could mean that the sponsor of a REIT may get a one-time capital exemption in exchange for units, but this needs to be confirmed,” he added.

JC Sharma of Sobha Developers lauded the decision of the government to overhaul capital gains tax and said it will indirectly enhance the promotion of housing for all in the country.

How these clarifications will play out in helping developers and funds finalise their plans to set up REITs will be an area to watch out for.

The minster also announced pass-through status for alternative investment fund (AIF) for category II. This is expected to make operations easy for realty private equity funds and encourage a lot of investors to put in money through this route.

The budget has also proposed to do away with the distinction between different types of foreign direct investment, especially between FDI and FPI. This is expected to go a long way in making the process of investment through equity, debt and other forms smoother. This will also remove the regulatory hurdle of taking different kinds of licences for different categories.

Developers

While the budget was a step ahead for PE community in terms of meeting their expectations, property developers are a disappointed lot with no mention about the roadmap for affordable housing and smart cities.

“The Budget did not have any major announcements to boost the stagnating housing demand in the country. Also, relaxation in interest deduction on home loan, subsidising interest rates and personal income tax limits were expected. The budget also lacked direction for the development of 100 smart cities and affordable housing,” said Neeraj Bansal, partner and head, real estate and construction, KPMG in India.

Though the FM did reiterate plans to build 20 million houses for rural India and 40 million for urban India, details on how that will be achieved and the modalities of private participation were missing.

The fraternity also feels that the minister failed to put out incentives for home buyers and developers of affordable housing.

Rajesh Prajapati, managing director, Prajapati Constructions, said that the Budget is a big disappointment to the real estate sector and the government did not deliver on what was expected.

Echoing the disappointment of the developers, Nipun Khandelwal, vice president, DMI Finance, which lends to realtors, said, “One of our key demands was to have some tax incentives for home buyers to bring back demand. The Budget said little on that front. Plus, it has also not given us the contours of affordable housing and how it plans to reach its target of housing for all by 2022.”

On the flip side the increase in service tax to 14 per cent will prove to be a burden for property developers and since they are expected to pass it on the buyers, it will affect the purchasing power of home buyers.

Additionally, in a positive move which is still seen as a serious blow to the real estate developers, the government has proposed a more comprehensive Benami Transactions (Prohibition) Bill which will enable confiscation of ‘benami’ property especially in real estate.

To curb black money in real estate, the minister has proposed that any transaction in advance of Rs 20,000 or more in cash for purchase of immovable property will be prohibited and PAN card number will be mandatory for any purchase in excess of Rs 1 lakh.

“The proposed bill on curbing black money is expected to significantly improve transparency in real estate sector,” said Bansal of KPMG.

(Edited by Joby Puthuparampil Johnson)


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Realty funds cheer clarity on tax pass-through status, REITs; developers disappointed

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