What this budget means for real estate

RAMESH NAIR

The Finance Minister Pranab Mukherjee presented 

the 2010 Budget last Friday. Although at the macro 

level it is a growth oriented budget and growth in 

the economy always leads to growth in the real 

estate sector, the reaction from the real estate 

sector has been mixed.

The real estate industry is an extremely important sector which
contributes significantly to the country's GDP, employing almost
20 million people and supporting more than 250 affiliate industries.
The overall reaction has been positive. The best part of the
budget has been that the income tax slabs have been raised
which will increase disposable income in the hands of the middle
class. Given below are the upside and the downside of the budget.


Positives
The overall allocation for infrastructure has increased to Rs.1.73 lakh crore with allocation for roads increasing to Rs. 20,000 crore. Better road infrastructure results in easier accessibility and creation of more land worth developing leading to lower cost of real estate.

The revision in personal income tax rates will put more money in the pockets of the middle class, increasing the buying power and affordability to buy homes.

Interest subvention of 1% for 10 lakhs of the loan amount will be given to the customers provided the cost of the property doesn't exceed Rs. 20 lakhs. The budgetary allocation for the same is earmarked at Rs. 700 crores.

The increase in allocation for slum redevelopment under the Rajiv Awaz Yojana to Rs 1,270 crore will ensure that key areas in city centres will begin to yield quality real estate supply. The allocations have also increased for rural housing under the Indira Awaz Yajana and 66,000 crore has been allocated for rural infrastructure development. Tax holiday on profits under Section 80 IB has been extended up to March 2013 with developers getting an extension of a year for completion of projects.

The warehousing sector will benefit with the ongoing scheme for private sector participation for Food Corporation of India to hire warehouses from private players for a guaranteed period of 7 years and with external commercial borrowings to be available for development of cold storages.

Negatives
· Service tax will be now applicable on sale of residential units during the construction period. This will increase total purchase price to the end consumer by around 3.3%.

· Service tax will also be applicable on rental income from commercial pro
perty including lease of office and land and on additional amenities such as floor rise and preferential location. This has been brought in with retrospective effect from June 1, 2007.

The Budget did not mention relaxing FDI into the real estate sector or REITs and REMFs.
There was also lack of affirmative action on increasing tax exemptions on housing loans, principal repayment and interest under section 80C and 24B respectively. This would have encouraged more home buyers to invest in real estate for tax saving purposes.

More clarity The developers were expecting the re-introduction of section 80 IB (10) tax benefit scheme. This was not considered. If this was reintroduced, the developers would have shared part of their profits with buyers and also increase the supply of smaller homes making homes more affordable.

The software companies, developers and owners of IT space were expecting more clarity in terms of the extension of tax exemption under the Software Technologies Park of India (STPI) scheme. This has not been addressed. This is expected to increase demand for space in IT SEZ's and further add to the problems of STPI developments.

The increase in excise duty on cement will push up construction costs increasing the burden on the home buyer.

Also many of the pre-budget expectations from the developer community such as industry status for the real state sector, rationalising stamp duty across all states, extending 80 ID tax holiday for hotels, reduction of works contract tax and VAT, infrastructure status for townships, single window clearance system for integrated townships, extension of the tax benefits under 80 IA of the industrial parks scheme and allowing of external commercial borrowing in the real estate sector were not addressed. Many of these would have also indirectly helped the consumer.

Ramesh Nair

is a Managing Director

with Jones Lang LaSalle Meghrajand