Union Budget 2015-16: The Halfway Reforms For Real Estate

Recently, The Economist claimed that it was India's chance to fly. The report argued that even as the economies of China and Brazil were on the trajectory of slow growth, it was actually a moment of reckoning for India to accelerate its economic growth. The much-anticipated Union Budget 2015-16 is now tabled. While the jury is still out on the big bang reforms expected from the Budget, PropTiger.com takes a quick look at the measures that could have a direct or indirect bearing on the real estate sector:

1. Infrastructure: The Narendra Modi led NDA government has proposed raising the investment in infrastructure by Rs 70,000 crore and also has plans to revive the private public partnership model of investment in the sector. The proposed Rural Infrastructure Development Fund will also see an investment of Rs 25,000 crore. These measures to boost infrastructural development come even as the government still grapples with fiscal deficit. In the past, governments have often slashed spending on infrastructural projects to make way for subsidies. This year, however, infrastructure is a sure shot winner.

2. AIFs: Finance Minister Arun Jaitley has announced FDI in Alternate Investment Funds (AIF). An AIF is a pooled-in investment vehicle for investing in real estate, private equity and hedge funds. The government will also eliminate categories such as Foreign Portfolio Investors (FPI) and Foreign Direct Investment (FDI) to encourage more foreign investors to invest in the markets in India. Infrastructure funds are Category 1 AIFs. So, this will encourage more investment in infrastructure development projects too.

3. Black Money: To curb transactions in black money in real estate, the government proposed to introduce Benami Transaction Prohibition Bill. It also proposed that using Rs 20,000 in cash for purchase or sale of immovable property should be disallowed. The monetary transactions in the Indian real estate markets often involve black money, and this prevents many investors and homebuyers from investing in property. Transactions often involve black money because the sellers often pressurize the buyers to understate the value of the property to evade capital gains tax. But, as the government has proposed an overhaul of the same, this is likely to bring down transactions in black money in real estate.

4. REITs: The proposed REITs are likely to invest in income generating assets held by Special Purpose Vehicles (SPVs). A barrier to the formation of the REITs is the taxation norms. The SPVs which exchange their shares for REIT units will have to pay corporate tax and dividend distribution tax, apart from capital gains tax while selling the REIT units in the future. The FM has proposed reducing the corporate tax from 30% to 25%, and this will reduce the tax burden on SPVs. The FM has also proposed reforming the capital gains tax rules to help the formation of REITs, though the specific reforms that are likely are not clear.

5. Wealth Tax: The Government has proposed eliminating wealth tax. In India, the wealth tax was 1% on net wealth exceeding Rs 30 lakh. This will encourage more investment in housing because housing prices are often much higher in many parts of the country.
6. Service Tax: The FM has proposed that the service tax be raised from 12.4% to 14%. While buying houses, the homebuyers are expected to pay service tax, apart from value added tax, stamp duty and registration charges.  So, hiking the service tax will discourage investment in the housing segment.

7. Smart Cities and Rental Income: Real estate players had expected the government to announce deductions on rental income to boost investment in the rental housing segment. The budget, however, was silent on this. The government did not announce measures that would bring in more clarity on building cities either, though investing more in infrastructural projects will improve outlook for the real estate sector in India.

Interested in reading more? Here is PropTiger.com's pre-Budget analysis of NDA government's reforms in fiscal year 2014-15.