The Finance Minister has spelt out three themes for Budget 2020 - An ‘Aspirational India’ focussed on ‘Economic Development’ and building a ‘Caring society’.
Extending “caring” and exhibiting “humane and compassionate” consideration to a few of the many demands of homebuyers and real estate developers, some relief on the tax front has been proposed. A big positive, on the other hand is the specific focus on the National Infrastructure Pipeline launched on December 31, 2019 and aimed at development, operation and maintenance of several infrastructure projects.
This is an opportunity for “realising” the potential of “realty” in revolutionising India.
Richard Thaler, a renowned economist observed “Tax cuts are one of the many ways to stimulate the economy. Building infrastructure is another.”
Are there giveaways for homebuyers?
In keeping with the goal of Housing for All, Finance Act 2019 provided an additional tax deduction of up to Rs 1.5 lakh on interest paid on housing loans for purchasing a first-time affordable home worth up to Rs 45 lakh provided the loan was sanctioned on or before March 31, 2020.
The Finance Minister has extended the date of sanction of loan for availing the additional deduction by one more year – the loan may be sanctioned on or before March 31, 2021. With an additional deduction of Rs 2 lakh on interest on home loan for a self-occupied house property, the total deduction for interest on home loan goes up-to Rs. 3.5 lakh.
However, to be able to claim this deduction one has to be mindful of an additional proposal in this Budget. A new incentive has been announced for individuals and HUF this year by providing for an optional and alternative simplified personal tax regime with reduced slab rates.
So, if one were to opt for the newly inserted reduced tax slabs, one will not be entitled to the additional tax deduction of up to Rs. 1.5 lakh for purchase of an affordable home. At the same time, if one were to continue to opt to be taxed as per the old personal tax rates and slabs, one can avail this additional deduction.
Availing of the new regime of reduced tax slabs will also not allow one to claim the additional deduction of the principal and interest paid on home loans.
Whether or not there will be an increase in the disposable income for individuals in the new optional regime and whether the same provides a stimulus for them to invest in real estate remains to be seen.
Do real estate developers get any sops?
As per Finance Act, 2019, a tax holiday was provided on profits earned by real estate developers of affordable housing projects approved by March 31, 2020. The sunset date for seeking approval for such affordable housing projects has been further extended up-to March 31, 2021. This will help in boosting the untapped demand for affordable homes.
As a measure to “reduce difficulties faced by tax-payers” some relief has been proposed. If one was entering into a real estate transaction and the sale consideration is less than the circle rate (value adopted by the Stamp Valuation Authority) by more than 5% of the sale consideration, the entire difference is taxable as income in the hands of the seller and buyer.
The safe harbour of 5% is proposed to be increased to 10% to ease real estate transactions so that there are no adjustments where the circle rate does not exceed 10% of the sale consideration. The proposal is expected to enhance real estate transactions of such nature by removing the deterrent.
A Business Trust, under the income-tax law means a trust registered as an Infrastructure Investment Trust or Real Estate Infrastructure Trust as per SEBI and whose units are required to be listed on a recognised stock exchange as per regulations. The Trusts raise funds from investors for investment in real estate or infrastructure projects.
The FM proposes to modify the definition of a Business Trust to do away with listing of units of a Business Trust on a recognised stock exchange. This should give a boost to all Real Estate /Infrastructure Trusts (including unlisted ones) and induce funding for real estate sector.
However, another proposed amendment in Budget 2020 is that dividend income received by a unit holder of a Business Trust would be taxable in the hands of the unit holder in line with overall shift proposed from erstwhile Dividend Distribution Tax (DDT) regime in the hands of the company to classical system of dividend taxation in the hands of the shareholder.
The dividend income was earlier exempt in the hands of the unit holder since there was single stage taxation of rent, interest and other income earned by 100% Special Purpose Vehicle (SPV) and distributed as dividend to the Business Trust which is further passed on to the unit holders.
There was no DDT payable by 100% SPV. But as per proposed amendment, while SPV will continue to pay tax on its incomes, dividends distributed will be taxable in the hands of unit holders. This may impact existing and future global and local investors in real estate and infrastructure adversely.
Infrastructure investment is an investment in jobs, health, economic growth and environment. The Finance Minister has prioritised investment in infrastructure in a big way. This is closely following the Independence Day Speech 2019 of the prime minister highlighting that Rs 100 lakh crore would be invested in infrastructure over the next 5 years.
As many as 6,500 infrastructure projects are in the National Infrastructure pipeline including housing, safe drinking water, access to roads, railways, airports, metros, logistics and warehousing. A National Logistics Policy is on the cards. Accelerated development of highways has been proposed with the FASTag mechanism. This should certainly have a positive spill over effect on real estate development and increase employment opportunities for construction, operation and maintenance of infrastructure projects.
In a tightrope walk, the FM has proposed small giveaways but has promised a host of policy measures for the real estate sector to invest in building the backbone of the country.
The author is senior tax professional, EY India. The views expressed are personal