Some joy, some pain for realty

Budget 2007 had both positive and negative tidings for the real estate sector. The one major positive was the five-year tax holiday given to developers developing two, three and four-star hotels and convention centers (seating capacity not less than 3,000) in the National Capital Territory of Delhi and in the districts of Faridabad, Gurgaon, Ghaziabad and Gautam Budh Nagar. According to Kamal Taneja, MD, TDI. “We are looking at developing hotels in NCR region, hence it is a positive step for us.” Jayant Verma, executive director, Knight Frank India, however warned that this is not an open-ended concession : developers will have to complete these hotels before the Games to avail of these concessions. The industry welcomed the budget’s emphasis on infrastructure.

According to Anuj Puri, MD, Trammell Crow Meghraj. “The completion of the Golden Quadrilateral project by 2009 is good news. It will enhance connectivity between metros and bring in considerable supply of land. New corridors will open up, where it will be possible to develop affordable housing.” The budget has extended Section 80-IB (4) of the Income-tax Act up to 31st of March. 2012, Says Puri : “This provision, which pertains to tax incentives for industrial undertakings, comes as a relief, Developers would otherwise have incurred an additional tax burden which they would have passed on to end users.” The budget also proposes putting in place regulations for creation of mortgage guarantee companies.

The budget also announced the creation of reverse mortgage for senior citizens. Says Sanjay Verma, Executive Managing Director, South Asia, Cushman & Wakefield : “Banks and housing finance companies will have greater comfort if mortgage is guaranteed, In India, the mortgage to GDP ratio is below 5 percent. This initiative will facilitate greater lending for housing purchase. The budget also proposes to grant pass-through status to venture capital funds investing in venture capital undertakings in hotel-cum-convention centers (of a certain description and size). This is expected to lead to more venture capital funds flowing into the hospitality sector, and hence to the development of more hospitality-related real estate.

Funding for national e-governance programme has been increased to Rs. 719 crore. The real estate sector will be a major beneficiary of this step. Says Verma of Cushman & Wakefield : “It will increase transparency in the real estate sector by allowing easy access to land records, and simplify the procedure for property registration. Property tax payment and land title check.”

The negatives

The imposition of service tax on rental from commercial property was a bolt from the blue, Property owners are expected to pass on the burden of this tax to occupiers, thus increasing the occupancy cost of industry. Says Kumar Gera, chairman, Confederation of Real Estate Developers Association of India (CREDAI): “The success of India’s ITITES industry in particular depends on low cost, By pushing up occupancy cost, this tax will erode this industry’s competitiveness.” According to Punit Beriwala, MD, Vipul group. “This tax could affect the fast-growing retail sector as well,” Adds Prodipto Sen, VP, Marketing. Alpha G Corp: “It could lead to unscrupulous elements declaring lower rental rates, as happens in sales transactions, with sellers stating a lower sale price to save on stamp duty.”

The finance minister’s excise proposal on cement has also not enthused the industry. According to the proposal, if a bag of cement costs up to Rs. 190, the excise duty on it will be Rs. 17.50 per bag. But if the price goes above Rs. 190 per bag, the excise duty will be Rs. 30 per bag. In other words, the finance minister is giving a concession of Rs. 12.50 for holding the price at Rs. 190 per bag. Gera of Credal believes this measure will, infact, prove inflationary. “Already cement prices are above Rs. 200. The retailer will increase the price by a further Rs. 12.50, and pass on the cost to the consumer.” He says. Sanjeev J Aeren. MD, AEZ Group believes that implementing this excise duty provision will require increased supervision, and could lead to Inspector Raj.

The budget denies tax exemption to venture Capital Funds (VCF) in all industries except a few high-tech ones. According to Puri of Trammell Crow Megraj. “There is now far less incentive to invest in real estate-related VCFs. This is a serious limitation, considering that India has not yet adopted REITs.” In the run-up to the budget, real estate industry association had lobbied hard for the continuance of section 801B (10) tax incentive for developers (available for housing developments of less than 1,000 sq. ft. in Delhi and Mumbai, and less than 1,500 sq. ft. in other cities). But this plea was turned down. In the final analysis, it was a mixed budget for the real estate sector, through what rankled industry stakeholders was the absence of definitive measures for encouraging growth of the sector.

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