Gaurav Karnik, Tax Partner and Leader – Real Estate practice, EY India
It is that time of the year when the entire industry looks forward to the Finance Minister Arun Jaitely’s speech on Budget Day to provide much needed relief and growth impetus in various sectors. The real estate sector is no different, given the significant impact that it has in terms of contribution to the GDP through various forward and backward linkages and, more importantly, on employment.
The last few years have not seen much activity in the real estate sector, which has been further affected by demonetization, and therefore this Budget could have a key impact on its revival. Some of the key asks of this sector from the Budget are as follows:
- Section 194IA of the Income Tax Act, 1961 (the Act) casts an obligation on the buyer to withhold tax at the rate of 1% on consideration paid for the acquisition of an immovable property. The provision poses onerous compliance requirements even on small purchasers. There is no clarity on points such as (i) whether a part of buildings/flats/apartments is covered in the provision, (ii) implications under co-ownership of property and (iii) loan arrangement from banks for purchase of properties. This lack of clarity has led to a lot of practical difficulties and undue hardship for buyers. Thus, the said provision should be done away with or relaxations should be introduced for individual purchasers. Alternatively, given the prices of real estate in the market, the threshold limit for the applicability of the provision should be increased from INR50 lakhs to INR1 crore.
- In relation to business trusts, although the Government has made significant changes to streamline the regulations as well as the tax framework for business trusts — Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) — there are certain consequential amendments that are needed in the tax framework:
- The tax treatment (capital gains exemption and MAT deferral) available to sponsors on the transfer of shares of a special purpose vehicle (SPV) to the business trust should be extended when the sponsor transfers the shares of the holding company, capital assets or interest in a firm or LLP to the business trust against the exchange of units.
- The units of a business trust should be accorded the same treatment as for the equity shares of a listed company. Accordingly, the period of holding for units to qualify as a long-term capital asset should be more than 12 months as compared to the current 36 months.
- Companies held under a business trust should be provided exemption from the provisions of Section 2(22)(e) and Section 79of the Act in order to make the structure more efficient.
- Similar to a beneficial rate of tax on the interest distribution made to non-resident investors, a beneficial rate of tax should be introduced for taxation of rental income distribution to non-resident investors.
- In order to meet the ambitious objective of the “Housing for All by 2022” scheme of the Government, it is necessary that tax break on interest on loan taken for acquiring house property be increased to INR500,000 from the existing INR200,000.
- On the indirect taxes front, there is a need to review the valuation provisions as provided in the Model GST Law and provide for the exclusion of land value or an abatement, of say 70%, toward the value of land. Alternatively, the sale of under-construction properties should be taxed at a lower/concessional rate of GST, say 12%. In addition, since property constructed is a business asset and the income of rentals generated out of this asset is subject to GST, credit for the GST paid on the goods and services used for construction purposes should be allowed without any restriction.
- Ambiguity toward the characterization of rental income as income from house property or business income has led to a debate with the tax authorities, thereby leading to litigation. It is necessary that an express provision is introduced under the Act classifying such income as business income. Such characterization would ensure that uniform practices are followed across the industry and litigation is reduced.
- It is the need of the hour that adequate clarifications/amendments are also provided in relation to joint development agreements. Adequate clarity should be provided in terms of taxable events in the hands of land owners.
These measures could provide the much-needed boost and impetus to the real estate sector.
(The views expressed are personal)
 Section 2(22)(e) provides that any payment by a closely held company by way of advance or loan to a shareholder holding 10% or more shares of the company or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf or for the individual benefit of an such shareholder, to the extent to which the company possesses accumulated profits, shall be treated as dividend.
 Section 79 provides for lapse of losses in case of change of shareholding of a company beyond 51%.