Budget 2016 good news for real estate sector
Arun Jaitley removes dividend distribution tax to make real estate investment trusts (REITs) a reality
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Bengaluru: The realty sector has much to cheer about from the Union budget. Finance minister Arun Jaitley has removed the last significant tax hurdle in the way of Real Estate Investment Trusts (REIT), given incentives to first-time home buyers and tried to make affordable housing more viable.
The budget left out REITs—listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and listing them as a trust—from the purview of dividend distribution tax (DDT).
“Another proposal to stimulate housing activity is to facilitate investments in Real Estate Investment Trusts. I propose that any distribution made out of income of SPV (special purpose vehicle) to the REITs and InvITs (Infrastructure Investment Trusts) having specified shareholding will not be subjected to Dividend Distribution Tax," Jaitley said in his budget speech.
In the last two budgets, the government has eased the path for REIT listing in India by providing pass-through status for rental income and rationalizing capital gains for the sponsors exiting at the time of listing of the units of REITs, subject to payment of securities transaction tax (STT).
But most developers and investors didn’t go ahead with their REIT plans due to the tax implications.
“From the speech of the finance minister, one of the most-awaited exemption of Dividend Distribution Tax on the dividend declared by the portfolio company to REIT and InvIT has been proposed. With this amendment, all the required fiscal support for REIT and InvIT to make it a reality has been done. This will support the developer and fund managers to raise funds through REIT/InvIT and create liquidity," said Hemal Mehta, partner, Deloitte Haskins & Sells Llp.
The biggest beneficiaries of REITs would be companies with large rent generating, commercial office portfolios, such as DLF Ltd, Blackstone Group Lp, K. Raheja Corp. and RMZ Corp.
Anuj Puri, chairman and country head at property advisory JLL India, said the DDT exemption cleared the final hurdle on the way of the successful listing of REITs in India. “We expect a few listings to happen in the current year itself—either by financial institutions or developers. Currently, around 229 million sq.ft of office space can be seen as REIT-compliant. If we assume that even 50% of these get listed, we are looking at a total REITs listing worth $18.5 billion," Puri said.
To fuel housing activity under the Pradhan Mantri Awas Yojna, through which the government has been trying to address the housing needs of the poor, Jaitley has proposed to give 100% deduction for profits to an undertaking from a housing project for flats up to 30sq.m. in four metro cities and 60sq.m. in other cities, approved between June 2016 to March 2019, and completed within three years of the approval.
Minimum Alternate Tax (MAT) will, however, apply to these undertakings. It has also been proposed to exempt service tax on construction of affordable houses up to 60sq.m. under any scheme of the central or state government, including public-private partnership schemes.
“For the first-time home buyers, I propose to give deduction for additional interest of 50,000 per annum for loans up to 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed 50 lakh," Jaitley said.
“Housing for all seemed to be the flavour of the real estate part of the budget presented on Monday. The direct and indirect tax benefits for affordable housing is expected to catapult the smart-city initiative. Additional deduction of interest would incentivise the first home buyers to own the houses," said Bhairav Dalal, partner - tax, at consultancy PwC India.
Sanjay Dutt, managing director (India) at real estate service firm Cushman and Wakefield, said that while the 100% deduction in tax from profits of affordable housing developers would increase their focus on the segment that has been largely ignored owing to business viability issues, the caveat of housing space limits (30sq.m. in four metro cities and 60.sq.m. in tier II cities) should have been equitable. The three-year window for project completion could have been for a longer duration as approvals and construction typically take a long time.
Bidya Sapam in Mumbai and Yogendra Kalavapalli in Hyderabad contributed to the story.
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