1 Budget Report 2015 I February 2015 I Colliers International

UNION BUDGET 2015 - A REAL ESTATE PERSPECTIVE

Steroids for the economy rather than vitamins to the real estate sector Mr. Arun Jaitley kicked off the budget by highlighting that the Indian economy is today in a far better state than in the past the agenda of the Union Budget is to lay out the roadmap for accelerating growth, enhancing investment and passing on the benefit of the growth process to the common man by creating employment for the youth.

The real estate sector had listed a number of issues that it wanted addressed in this budget. However, the Finance Minister made few direct announcements for real estate like housing units for rural and urban housing by 2022, tax incentives for REITS and InvITS, allocation of INR 150 crore for setting up of world class IT hub and Introduction of the Benami Transaction Bill.

The mantra of this budget is to provide an impetus to economic growth through improving the ease of doing business in India, enabling conditions to allow foreign and private sector investment in manufacturing, infrastructure and the social sectors, ensuring more credit for business. It has a major capital outlay and programs for the infrastructure sector. All of these will indirectly help grow the real estate sector.

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BSE SENSEX 0.48

Realty Index 0.90

Anant Raj Ltd. 3.13

DB Realty Ltd. 0.86

DLF Ltd. 0.22

Godrej Properties Ltd. 0.87

HDIL 0.42

Indiabulls Real Estate 3.38

Mahindra Lifespace 6.93

Oberoi Realty Ltd. 0.28

Omaxe Ltd. 2.39

Phoenix Township Ltd. 0.52

Prestige Estate Ltd. 1.22

Sobha Developers Ltd. 0.79

Unitech Ltd. 4.40

“On the face of it the budget seems to have overlooked the real estate sectors. However, the thrust on infrastructure, assuming it translates to real spend in this fiscal year can be a tremendous boost to the real estate sector with a much bigger impact than a few tax breaks that the sector looks for. The FM seems to have gone for administering steroids for turning around infrastructure rather than giving vitamins to the real estate sector.”

Joe Verghese, MD, Colliers International India

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Stock Market Reaction

KEY HIGHLIGHTS OF THE BUDGET FOR THE REAL ESTATE SECTOR

Do you think, in upcoming Budget, REITs will get more tax incentives and exemptions from DDT, Corporate Tax, Stamp Duty etc.?

60 million housing units in rural and urban areas under Housing for All 2022

Impact: Reaffirming the Government’s commitment to “Housing for All by 2022” the budget announced 6 crore housing units. The Central Government will build 2 crore houses in urban areas and 4 crore houses in rural areas. This will also help to fill the huge supply demand gap in the housing sector.

2 Budget Report 2015 I February 2015 I Colliers International

Rationalisation of the Capital Gains Tax for REITs and InvITs, subject to payment of Securities Transaction Tax (STT)

Impact: The budget proposes to rationalise the capital gains for the sponsors exiting at the time of listing of the units of REITs and InvITs, subject to payment of Securities Transaction Tax (STT). It is proposed that the sponsor will be given the same treatment on offloading of units at the time of listing as would have been available to him if he had offloaded his shareholding of Special Purpose Vehicle (SPV) at the stage of direct listing. Further, the rental income arising from real estate assets directly held by the REIT is also proposed to be allowed to pass through and be taxed only in the hands of the unit holders of the REIT. This will help to make REITs financially more viable and allow monetisation of operational assets and enable increased participation of retail investors in real estate.

Introduction of new Benami Transactions (Prohibition) Bill in current session of the Parliament

Impact: This law will enable confiscation of Benami properties and allow prosecution of those undertaking such transactions. Through this bill, the aim is to block a major avenue for generation and holding of black money.

Amendment in the provisions of section 269SS and 269T of the Income-tax Act to curb black money in real estate sector

Impact: The budget proposes to amend the provisions of section 269SS and 269T of the Income-Tax Act so as to prohibit acceptance or re-payment of advance in cash of INR 20,000 or more for any transaction for immovable property. It also proposes to provide a penalty of an equivalent amount in case of contravention of such provisions. This will curb the generation of black money in real estate and increase overall transparency in the real estate sector.

COLLIERS PRE BUDGET POLL RESULT

In the upcoming budget, will the Finance Minister exclude principal repayments on home loans from benefits under Section 80C?

PAN mandatory for any purchase or sale of assets exceeding INR 1 Lakh

Impact: The FM has made it mandatory to quote the Permanent Account Number (PAN) for any purchase or sale exceeding a value of INR 1 lakh. This will to curb the black money transactions in the sector.

Increase in Service Tax from 12.36% to 14%

Impact: The budget increased the Service Tax rate from 12% plus education cess to 14%. This will increase the overall burden on the buyer of under-construction properties. In case of under-construction flats, the effective rate works out to 3.09% of the value of property. This is because Service Tax is not applicable on the entire purchase price. Since there is an element of sale of goods, in addition to service, the tax is applicable on only 25% of the gross consideration.

3 Budget Report 2015 I February 2015 I Colliers International

Will the Finance Minister reduce the Minimum Alternative Tax (MAT) imposed on SEZs in the upcoming budget session?

Allocation of INR 150 crores to create world class IT hub in India

Impact: This will encourage more IT investment from Indian as well as the Global IT/ITeS giants and subsequently create a demand for technology enabled offices, even in Tier II cities of India. This will promote a network of world-class innovation hubs and Grand Challenges for India.

GST effective from 1st April 2016; Service Tax increased from 12.36% to 14%

Impact: Introduction of Goods and Services Tax (GST) will lead to unified tax rates across the country. Taxes paid in one state will be allowed to be adjusted against taxes payable in another state. It is also likely to bring down cost, improve tax compliance and collections.

COLLIERS PRE BUDGET POLL RESULT

Corporate Tax to be reduced from 30% to 25% in the next 4 years Impact: This will encourage MNCs to do business in India, which will lead to higher level of investment, increased growth and more jobs which in-turn will generate demand for the commercial office space on pan India basis. This will be applicable from next year. However, this process of reduction will be accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for Corporate Tax payers.

In the upcoming budget, are you expecting reduction in the tax bracket for rental income from the current 30%?

Do you think, in the upcoming budget, FM will announce tax incentives on construction materials like cement, bricks, iron etc.?

4 Budget Report 2015 I February 2015 I Colliers International

Increase in investment in infrastructure by INR 70,000 crore in the year 2015-16, over the previous year from the centre’s funds and resources of Central Public Sector Enterprises (CPSEs).

Impact: The FM highlighted that our infrastructure spending does not match our growth ambitions and thus has increased the budgeted capital outlay on infrastructure by INR 70,000 crore. The budget also announced various schemes such as INR 25,000 crore to Rural Infrastructure Development Fund (RIDF); INR 15,000 crore for Long Term Rural Credit Fund; INR 45,000 crore for Short Term Cooperative Rural Credit Refinance Fund; INR 15,000 crore for Short Term Regional Rural Banks (RRB) Refinance Fund, etc. This shall enhance capital flow in infrastructure sector which will indirectly give impetus to the Real Estate industry.

Allocation of INR 1,200 crore for DMIC Corridor.

Impact: In line with the development of industrial cities along major industrial corridors, the FM allocated an initial sum of INR 1,200 crore for DMIC corridor for the development of Ahmedabad-Dhaulera Investment Region in Gujarat and the Shendra–Bidkin Industrial Park near Aurangabad (Maharashtra) that are now in a position to start work on basic infrastructure. He has also promised to provide additional funds once project progresses.

Enhancement of the deduction limit of health insurance premium from INR 15,000 to INR 25,000; Increase in deduction of contribution to a Pension Fund and New Pension Fund from INR 1 lakh to 1.5 lakh; Increase in transport allowance exemption from INR 800 to INR 1,600 per month.

Impact: With a view to encourage savings several measures are proposed to be taken by way of incentives under the Income Tax Act. This will bring about an increase in disposable income in the hands of the common man and will in turn raise the spending power and boost domestic investments.

Intent to appoint an expert committee to make pre-existing regulatory mechanism to simplify multiple approval system.

Impact: The FM expressed his intent to set up an expert committee on framing a regulatory mechanism to simplify the current system of seeking multiple approval from multiple bodies. This is step towards the single-window online approval system.

COLLIERS PRE BUDGET POLL RESULT

5 Budget Report 2015 I February 2015 I Colliers International

INDUSTRY’S EXPECTATION FROM BUDGET 2014

• Removal of dividend distribution tax on distribution of profits by SPV to REITs

• Exemption from stamp duty on transfer of asset to REITs

• Pass through on Rental Income arising from real estate assets directly held by REITs

• . Removal of the Minimum Alternative Tax imposed on SEZ

• Infrastructure status to affordable housing / housing sector

• Increase in FSI (Floor Space Index

• Tax incentives on construction materials

• Provision of additional FSI for public parking and utility development

• Additional FSI for developing smaller, affordable houses (300–500 Sq.ft.)

• Provision to increase foreign investors ‘/ FIIs’ participation in the Real Estate sector

• Extension of the external commercial borrowing (ECB) scheme to the entire Indian Real Estate Sector

• Environmental Clearance at Master Plan level not on project basis

• Relax Counter-Productive Clauses In LARR (Land Acquisition, Rehabilitation and Resettlement) Act

• Enactment of the Real Estate (Regulation and Development) Bill

• Extension of tax exemption under Section 80 IA (4) for industrial parks

• Increase in deduction available under Section 24 to at least Rs 300,000

• Exclusion of principal repayments on home loans from benefits under Section 80 C

• Reduction in tax bracket for rental income from 30% to 20%

• Inclusion of Housing Finance Company (HFCs) deposits for tax exemption u / s 80 C of Income Tax Act

• Increasing the deduction u / s 24(a) of the IT Act for repairs, maintenance, etc. from the current 30% to 50%

• Reinstatement of the tax holiday benefits under Section 80 IB–(10) for Affordable Housing Projects

• Removal of Service tax on Under-Construction Property

• Increase in disposable income in the hand of individual taxpayers

• Increase in deduction of interest paid on borrowed capital for home loan

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