Opinion: Real Estate Sector Proposals Are a Pleasant Surprise

It was a fine balancing act displayed by Finance Minister Arun Jaitley in Union Budget 2016. Structurally speaking, Budget 2016 focuses on the agriculture and infrastructure sectors and seeks to address growth challenges facing the economy. The proposals impacting the real estate sector are a pleasant surprise for the sector, which was hitherto ignored in the previous budgets.

The key proposals impacting the real estate sector are discussed below: 

1. Much awaited exemption from levy of dividend distribution tax on amount of dividends paid by a special purpose vehicle to a Real Estate Investment Trust (REIT): The proposed amendment should make REITs a viable vehicle for real estate developers to monetise their assets and raise funds from investors and at the same time reduce the debt in the sector.

2. 100 per cent deduction on profits earned by an assessee engaged in developing and building an affordable housing project, subject to certain conditions: This should enable investments in the affordable housing sector and meet the objective of providing shelter to the masses at affordable in line with the government's objective of 'housing for all' by 2022.

3. Section 50C of the Act provides for mechanism for determining value of land or building or both for determining the capital gains on their transfer, a controversy existed where the date of agreement and date of registration of such land or building or both were not same. In line with the existing provisions of section 43CA of the Act i.e. when an immovable property is sold as stock in trade, it has been proposed to provide that stamp duty value on the date of agreement may be taken for the purpose of computing the full value of consideration. This would put an end to the controversy that existed for determining the date where there is a gap between the date of agreement and execution of sale deed.

4. Increase in period for acquisition or construction to 5 years (from existing time limit of 3 years) from the end of the financial year in which such capital was borrowed for providing deduction in respect of interest on borrowed capital. Such increase would provide relief to the taxpayers where the period of acquisition or construction exceeded 3 years.

5. Simplification of provisions in respect of unrealised rent and arrears of rent; a single section (section 25A) has been proposed to be inserted to provide that amount of rent received in arrears or amount of unrealised rent received subsequently shall be chargeable to tax in the financial year in which such rent is received or realised. Further, it has also been provided that 30% of such amount shall be allowed as standard deduction;

The measures, specially, in relation to REITs and affordable housing would go a long way in easing the liquidity crises being faced by the sector and in achieving the vision of "Housing for All". With exemption in dividend distribution tax being provided, one can now say that REITs are truly "pass-thru" vehicles from a tax perspective and are at par vis-a-vis a direct investment in real estate. This was a long-standing demand and makes the Indian REIT taxation regime comparable to the taxation regime of REITs in developed markets such as Singapore, US, Japan and Australia. This will definitely provide an impetus to launching of REITs in India and we should see the first few REITs being launched in India in the next 12 months. This will pave the way for a new public vehicle which will be an enabler for developers to off-load completed rent yielding vehicles to raise funds and also for the common man to participate in real estate returns which was hitherto not possible for various reasons such as high ticket sizes etc.

(Maadhav Poddar is Director, Tax and Regulatory Services, EY)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.