Budget 09 fails to make an impact on real estate sector:EY

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The Finance Minister's decision to leave real estate almost untouched in these troubled times may not go down well with the industry. The sector was expecting a lot from the budget after being so adversely impacted by the economic downturn. Though, the budget announced measures for continued economic reform and development, which will benefit the sector in the long term, the absence of any direct announcements benefiting the sector could act as a dampener for the industry.

On the positive side, measures such as increased outlay on schemes such as JNNURM/Rajiv Awas Yojana, allocation of Rs 2,000 crores for Rural Housing Fund, launch of programme of housing to create 1 lakh dwelling units for Central Para-Military Forces personnel, increased allocation for common wealth games are all welcome initiatives. Introduction of 100% deduction for capital expenditure incurred for setting up and operating warehousing facilities for storage of agricultural produce should result in investments in the segment. Reduction of TDS rates on rental payments from 20% to 10% on use of land, building or furniture and unconditional excise duty exemption to prefabricated structures for building and so on are steps that should have a positive impact on the cash flows of real estate companies. Rationalisation of tax holiday provisions in respect of deductions available to developers of affordable housing, deemed valuation for property transfers not registered for stamp duty purposes are steps that would go a long way in promoting transparency in the sector.

However, not all measures which were announced are applauded by the sector. Benefits of the composition scheme of 4% under 'works contract service' would now be available only if tax is paid on the entire value of goods and services (whether under the same contract or any other contract including goods received free of cost). CENVAT credit has been denied on specific goods used for construction of shed, building or structure for support of capital goods, which would further add to the cost of construction. These could have an adverse impact on the costs and consequently sales in the current market.

The sector was expecting measures such as extension of incentive for affordable housing, measures to boost capital funding and eliminating liquidity crunch, providing a mechanism for taxation of REMF, increasing available deduction for interest on housing loans and so on but the budget fell short on such expectations.

Overall, budget 2009 failed to make an impact on the real estate sector and has left it wanting for more. Hopefully, the new Income tax code to be released in the next 45 days will have measures, which shall provide much needed impetus to the Indian real estate sector.

Gaurav Karnik is a senior tax professional with Ernst & Young, India.