Budget 2012: Realty developers fear credit crunch on capital gains tax

While the recent CRR cut raised fund-raising hopes among real estate companies, the budget though has come as a reality check. With the government tightening regulations for capital raising the sector is now once again worried about a credit crunch.

Priyanka Ghosh, Reporter ,CNBC-TV18

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India Business Hour at 09:00 pm

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While the recent CRR cut raised fund-raising hopes among real estate companies, the Budget though has come as a reality check. With the government tightening regulations for capital raising, the sector is now once again worried about a credit crunch, reports CNBC-TV18's Priyanka Ghosh.

Fund raising for private realty companies has become tougher as fresh issuance of shares will now carry a capital gains tax, effective from April, 2013.

What does this mean?

Any company will have to pay tax on the difference between a company's fair market value and the premium it gets through the equity issuance.

According to market experts, the government is now treating fresh issue of shares as sale of shares, from which a profit has been earned. But in effect, a fresh issuance only increases the equity capital and does not impact a company's P/L.

The industry says, the ruling is likely to impact private equity transactions in the real estate sector adversely.

All this, compounded by the negligible increase of income tax exemption limit and increase of service tax by 2% to 12% is worrying companies as demand continues to be under pressure.

But, there were some sops as well. A 1% tax rebate has been announced for home loans upto Rs 15 lakh for houses costing upto Rs 25 lakh and a TDS deduction is put in place for property transactions.

Also, the Centre's push for cheaper homes continues, as it now opens channels of fund raising via ECBs for affordable housing.

The interest through the ECB will be lower than what banks are offering to the development companies and that might mean a structural change. So, those who do not look at affordable housing may now have to look into it.

Anuj Puri, country head, Jones Lang LaSalle said: "The interest through the ECB will be lower than what banks are offering to the development companies and that might mean a structural change so those who do not look at affordable housing may now look into it."

But are these incentives enough to lift a sector weighed down by high debt, low liquidity, tepid demand and increasing inflation? The industry reaction to the Budget has been mostly of disappointment. They feel the government has failed to spell out any measures that would either ease fund raising or demand materially.

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