The Hindu Business Line : Housing growth

A shaky world economy, changing characterisation of growth in real estate (from “explosive” to “steady”), increasing focus on quality and segregation of risk classes for the same asset points to a maturing phase in the country’s real-estate economy. Rather than land consolidation and appreciation, we are likely to witness commoditisation (with the consequent need for differentiation in the product portfolios of developers), professionalism in product and service delivery, and sophistication in funding.

The Budget this time is immediately preceded by two significant regulatory events — the introduction of draft regulations for Indian REITs and an amended and severely constricted Industrial Parks scheme.

The latter no longer sponsors IT parks, and an IT sector already depressed by the appreciating rupee and service tax on rentals is now likely to be bereft of office space if the STPI scheme stands extended. The regulator’s move from the Ministry of Commerce to the CBDT reflects the Government perception of revenue leakage through this scheme in the past. Needless to say, the omission of a sunset clause is stark and merits consideration to assuage the concerns of those whose projects are under way.

The REIT launch (albeit in draft form) is laudable; what is needed, however, is the taxation framework, which one hopes will be similar to the one applicable to equity-linked mutual funds. A fiscally transparent status, non-taxability of retained earnings, distribution tax on proceeds devolving to investors should be mooted. Gains on sale of REIT units should be exempt where the holding period is one year or more, and taxed at 10 per cent where the holding period is lesser. Withholding tax exemptions and investor taxation exemption should also be par for the course.

Flexibility of investing in SPVs (and not just assets), dispute protection and more elbow room (relaxation of investment conditions) are also needed to promote the viability of the REIT form of funding.

Stamp duty rationalisation in India is likely to be as onerous as VAT, but the necessity has now become overriding. Credit mechanisms, lowering of tax rates and exemptions for REITs are now de rigueur. It is only the Central Government that can take the lead in lobbying for State amendments in this regard.

Regulation of the sector suffers from lack of attention and incomplete draft law. Fiscal incentives and exemptions too are needed to account for the growing gap between housing demand and supply across the middle and lower end of the market. Affordable housing should not be a distant dream for the larger populace. There is need for improvements in quality of urban transport and city infrastructure, such as parking and roads.

Infrastructure, real estate and information technology sectors are likely to vie for largesse from the Finance Minister. In the draw of straws, one just hopes that the real-estate sector does not come up short.

It is only fair however that the quest for liberalisation be balanced by regulation — India should avert a crisis of the sub-prime kind, as it did the currency crisis of the 1990s.

The author is Senior Manager, Global Tax Advisory Services, Ernst & Young

More Stories on : Budget | Real Estate & Construction

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page