During the recent years, Indian real estate sector has been in doldrums, particularly since demonetization lapped down a large source of funds that supported the industry. The first growth phase of the decade came to the sector in 2018, when the second half marked a 119 percent escalation in new launches of residential housing projects across cities.
In order to grab onto these recent signs of recovery and provide an election-safe taxation agenda, the interim budget had proposed an array of measures to augment growth in the real estate sector and reduce tax burden, especially on middle-class and first-time home buyers.
The budget sought to increase the number of self-occupied houses exempt from ‘notional rent’ tax from one to two houses, and allowed investment of long term capital gains in two houses tax-free, as against the erstwhile restriction on the purchase of only one house. Middle-class taxpayers and migrant working-class homeowners were relieved by the proposal, as they may be required to maintain two self-occupied houses for the purposes of caring for aged parents, convenience of location, proximity to workplace or schools, etc.
By extending the period of exemption from taxation of notional rent from unsold housing units to two years from the end of construction, the interim budget also extended its support to developers and builders. Further, tax benefits of up to 100 percent deduction of profits for developers engaged in affordable housing projects, were also extended till March 31, 2020.
Having paved a solid path for the upcoming budget, some clarity is now expected on many points of contention surrounding taxation in real estate.
For example, it is anticipated that the July 5 budget would dispel the ambiguity in the applicability of Section 50C of the Income Tax Act, 1961 – under this provision, if the stamp duty value (SDV) of land or building being transferred is over 1.05 times the actual consideration of the transaction, capital gains taxes in the hands of the transferor are imposed based on such higher SDV and not the undervalued consideration actually received.
It is unclear whether the provision would apply when leasehold rights are converted to freehold, or when developers engage in exchanging transferable development rights (TDR), i.e., since TDR would possibly not qualify as ‘land’ or ‘building’.
In the context of joint development agreements, separately, Section 45(5A) provides for similar treatment of SDV as consideration. However, unlike Section 50C, Section 45(5A) does not encompass a valuation adjudication mechanism through which the taxpayer may challenge the SDV computed as consideration. Although the courts have offered their varied viewpoints on these issues, legislative clarification is a must, especially when the real estate sector is looking to recover and expand.
The same uncertainty exists in context of Section 56 of the Act, which taxes the recipient of specified property if it was received at less than stamp duty value. Introduction of a comprehensive taxation regime for real estate investment trusts (REITs) is another aspect on which the budget could focus.
Government’s efforts to facilitate the ambitious ‘Housing for all’ scheme would come to fruition in the upcoming budget, believe industry experts. What also remains to be seen is whether Nirmala Sitharaman’s ministry would target diffusing the NBFC deadlock that plagues the industry.
In respect of rental income earned by developers, the ministry is contemplating the grant of a 10 year long tax holiday. For housing projects that had been delayed or stalled due to lack of resources, homebuyers had also demanded last year that an EMI holiday be allowed. They had also suggested that a stressed asset fund be instituted to bail out pending housing projects.
On June 6, the RBI threw in its lot with a rate cut, of which real estate is expected to be a key beneficiary. The SEBI had brought forth changes to ease the setting up of, and support investors’ claims regarding, REITs, including the reduction of the minimum subscription limit to Rs 50,000.
With demonetization, RERA, and GST having settled down, all eyes have turned toward the finance ministry, where the budget could shape the promising future of the real estate sector.