16 March 2012

Budget PLUS 2012 - Key features of India's Union Budget Impact on Real Estate Sector

Economic survey 201112: Highlights

After witnessing robust growth between 2003 and 2011 (except in FY09, when the growth was 6.7%), the Indian economy witnessed a slowdown in FY12. This is partly due to global factors such as the Eurozone crisis, sluggish growth in other countries, hardening international crude oil prices and partly due to domestic factors such as slower reforms and the tightening of monetary policy to control inflation, which resulted in slower investment and growth, particularly in the industrial sector. As a result, the Indian economy is expected to witness a growth rate of 6.9% in FY12, as against 8.4% in the previous two fiscals. However, as compared to other countries, India is still among the front-runners, as both agriculture and services sectors continue to perform well. The agriculture and allied sectors registered a growth of 2.5% during the year, while services witnessed growth of 9.4%. However, the growth in industry dipped to 3.9% in FY12. The savings rate has declined to 32.3% in FY11 and investment rate has declined to 35.1% during the same period. Fiscal deficit as a percentage of GDP has declined from 6.3% in FY10 to 4.8% in FY11 and is estimated to be 4.6% in FY12. The survey is optimistic about the long-term prospects of the economy. It projects that the Indian economy will recover gradually and grow at 7.6% in FY13, as fiscal consolidation and possible reduction in policy rates due to easing of inflationary pressures will encourage investment activity and facilitate growth. The following are some of the highlights related to the real estate industry in the survey: Real estate (including ownership of dwellings and business services) sectors share in GDP was 10.6% in FY11. The housing sector alone contributes approximately 5% of Indias GDP. The per capita net national income is expected to increase from INR53,331 in FY11 to INR60,972 in FY12, reflecting 14.3% growth. In order to encourage FDI inflow, FDI policies in India have been continuously liberalized. During April-December 2011, FDI inflows increased by 50.8% compared to the same period in the previous year.
Services (financial and non-financial), telecom, construction, drugs & pharmaceuticals, metallurgical Industries and power sectors attracted the maximum FDI during the first nine months of FY12. Between April and December 2011, FDI inflow to the housing and real estate sector was INR25.4 billion, as against INR46.8 billion in the same period in 2010.

FTAs during the calendar year 2011 were 6.29 million reflecting a growth of 8.9% over 2010 and FEEs in 2011 were INR775.9 billion reflecting a growth of 19.6%. Domestic tourism provided resilience to the sector, with domestic tourist visits during 2010 being estimated at 740.2 million, with a growth of 10.7%. The Government of India has requested the states to adopt measures to rationalize luxury tax on hotels to make their destinations more competitive. The states have been requested to exempt room tariff below INR2,500 from luxury tax and also to charge luxury tax at a uniform rate of 4% on actual tariff. A Hospitality Development and Promotion Board has been set up at central level to monitor and facilitate clearances/approvals for hotel projects both at central and state government levels. The growth in FTAs in the next two years is expected to be driven by tourists from South Asia, East Asia, and South East Asia, rather than those from North America and Western Europe. Real estate housing Index: The National Housing Bank (NHB) launched NHB RESIDEX, a representative housing price index (HPI) for select cities, in 2007. The RESIDEX captures the price trends in 15 cities on a quarterly basis with 2007 as the base year. In the latest survey, RESIDEX has been updated and released for the quarter ended December2011. The RESIDEX

Tourism: In India, the tourism sector has witnessed significant growth in recent years. During the period 2006 to 2011, the CAGRs of foreign tourist arrivals (FTA) and foreign exchange earnings (FEE) from tourism were 7.2% and 14.7% respectively. As on 31 December 2011, there were 2,895 classified hotels having a capacity of 1,29,606 rooms in the country.

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revealed that prices of residential properties during the period 2007 to 2011, have increased in 11 cities while 4 cities have witnessed a decline. The primary reason of increase in prices may be increase in inflation rate, especially rising building material prices and increase in demand of housing due to improvement in infrastructural facilities and increase in business and economic opportunities. Maximum price rise was in Chennai (166%) followed by Bhopal (117%) and Faridabad (116%). Other cities which showed an increase in prices with respect to base year are Kolkata (92%), Mumbai (87%), Ahmedabad (67%), Pune (63 %), Lucknow (60 %), Delhi (54 %), Surat (47 %), and Patna (43 %). However, during the same period, four cities have witnessed decline in prices with maximum decrease observed by Jaipur (36%) followed by Hyderabad (14%), Bengaluru (6%) and Kochi (2%). Special Economic Zones (SEZs): Since the notification of the SEZ Act in February 2006, 583 SEZs have been given formal approvals and 380 have been notified. Total number of operational SEZ in the country stands at 154 with 3,400 units and total employment provided to 815,308 people. There has been overall growth of exports of 2,180% over past eight years (2003-04 to 2010-11). Physical exports from the SEZs have increased from INR2,207.1 billion in 2009-10 to INR3,158.7 billion in 20103

11, registering a growth of 43.11%. Exports from SEZs for the first three quarters of FY12 were estimated at INR2,609.4 billion. Total investments in SEZ till 31 December 2011 was INR2,496.3 billion including INR2,311.6 billion in the newly notified zones. Minimum alternate tax (MAT) was increased to 18.5% of book profits and the levy was extended to SEZs. All clearances from SEZs into the domestic tariff area (DTA) exempted from special additional duty (SAD) of 4 % provided they are not exempt from the levy of value added tax (VAT)/sales tax. Credit to real estate: In order to tame rising inflation, RBI has taken stern measures in the form of rate hikes, however lately there has been concerns over the growth of real estate due to high interest rates. The base rate system, introduced since 1 July 2010, has improved the transparency in lending rates. The y-o-y growth of bank credit by scheduled commercial banks was 17.1% as on 16 December 2011 while it was 23.9% in the corresponding period of previous year. Since March 2010, RBI has increased the repo rate 13 times cumulatively by 375 basis points (bps). As a result, banks have been raising their deposit and lending rates.
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The Government of India notified the establishment of the Central Registry. The objective of setting it up is to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property. Gross bank credit to housing increased from INR3,461.1 billion on 25 March 2011 to INR3,725.0 billion on 18 November 2011. Gross bank credit to commercial real estate increased from INR1118.4 billion on 25 March 2011 to INR1,166.7 billion on 18 November 2011. During the same period, gross bank credit to tourism, hotels and restaurants also increased, from INR277.3 billion at the end of March 2011 to INR302.6 billion in November 2011.

Affordable housing:
In order to reduce housing deficit in the country, the government has proposed the creation of a Mortgage Risk Guarantee Fund under the Rajiv Awas Yojana (RAY) to enable provision of credit to economically weaker sections (EWS) and low-income group (LIG) households. During FY12, under the Indira Awas Yojana (IAY) (one of the six components of the Bharat Nirman programme), 2.12 million houses were sanctioned (against the physical target of 2.73 million) and 0.73 million constructed as on 31 October 2011.

Union budget 2012: Impact Policy measures: Some key policy measures announced by the Finance Minister which could impact the real estate industry are as under: External Commercial Borrowing (ECB) is now proposed to be permitted for low cost affordable housing projects. Credit Guarantee Trust Fund is proposed to ensure better flow of institutional credit for housing loans. Scheme of interest subvention proposed to be extended for this year, under which 1% subvention is allowed on housing loan up to INR 1.5 million, provided the cost of house does not exceed INR 2.5 million. Increase in allocation under Rural Housing Fund from INR 30 Billion to INR 40 Billion proposed. Direct tax proposals: No change in existing income tax rates for companies. Securities transaction tax (STT) on delivery based transaction proposed to be reduced to 0.1% from 0.125%. Beneficial tax rate of 15% on dividends declared, distributed or paid by a specified foreign company proposed to be extended for FY 2012-13. Vodafone impact Definitions of through, transfer and capital asset widened. Share or interest in a company or entity registered or incorporated outside India deemed to be

situated in India, if it derives its value, directly or indirectly, substantially from Indian assets. Amendments referred to as clarificatory and proposed with retrospective effect from 1 April 1962. Dividend distribution tax (DDT): Exemption for holding company from payment of DDT to the extent DDT paid by subsidiary now available in multi-tier corporate structure as condition with regard to recipient not being a subsidiary of another company proposed to be removed. General Anti Avoidance Rules (GAAR) proposed to be implemented as a measure to counter aggressive avoidance schemes. Tax treaty not available where GAAR applies. Advance Pricing Agreement (APAs) introduced with effect from 1 July 2012. CBDT empowered to enter into an APA with any person, determining the arms length price (ALP) or specifying the manner in which ALP is to be determined, in relation to an international transaction. Share application money, share capital, share premium, or other such sum credited in the books of a company (not being a company in which public are substantially interested) to be taxed in its hands unless the resident shareholder/ subscriber (other than a registered venture capital fund) explains the nature and source of the investment. Lowering of withholding tax rate from 20% to 5% for the next 3 years on interest payments being made on ECB. This being applicable to ECB taken for developing affordable projects.

Benefit of Investment linked deduction for capital expenditure increased to 150% as against 100% for developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government and notified by the Central Board of Direct Taxes, in accordance with the guidelines to be prescribed. However, the scheme has not been framed by the Government in past one year. Tax to be withheld at the rate of 1% in case of transfer of immovable property after 30 September 2012, if the consideration exceeds INR5 million, for property in an urban agglomeration; INR 2 million, for property in any other area. Relief from long term capital gains on transfer of residential property (house or plot of land) if Invested in equity of new start up SME company in the manufacturing sector; The company utilizes the funds for purchase of new plant & machinery; and Subject to fulfillment of other conditions Exemption of income of SEBI registered Venture Capital Fund (VCF)/Venture Capital Company (VCC) extended to all sectors, including Real Estate Sector.

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Indirect tax impact: Service tax Service tax rate to be increased from 10.3% to 12.36%, w.e.f 1 April 2012. In line with increase in the general rate of Service tax, rate of Service tax under Works Contract composition scheme to be increased from 4.12% to 4.944% w.e.f 1 April 2012. Shift from positive list to negative list has been proposed under Service tax law . However, no date has been proposed for introduction of the said changes. In the proposed change in Service tax regime (ie on introduction of negative list), exemption from Service tax has been granted to specific low cost housing schemes (where the carpet area is up to 60 sq mt. per house) For the purpose of Works Contract, following amendments have been proposed in the Service tax Valuation Rules, which may be relevant for the real estate sector: Value of services would be the total value of the contract less the value of goods transferred (may be taken as declared for State VAT purpose) If the value of goods is not ascertainable, the value of service would be 40% for original works (ie, new constructions etc) or 60% (for other works) If the value of original works includes the value of land, the value of service would be 25%
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The general time limit for issuance of a taxable invoice for provision of a service has been increased from 14 days to 30 days from the completion of service. Some of the Service tax related compliances (such as registration/ return filing) have been proposed to be significantly simplified. Excise duty/ Customs duty Peak Excise duty rate increased from 10% to 12% w.e.f 17 march 2012 Effective peak Customs duty on import increased from 26.85% to 28.85% w.e.f 17 March 2012 The above increase in duty rates would result in increase in input cost for the RE players

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