Budget 2012-13: Realty reacts with some pain-some gain rhetoric

Lalit Kumar Jain, CREDAI President and KUL CMD

It is a highly disappointing budget. The Finance Minister has miserably failed in highlighting the importance the role of Housing in economy, employment generation, apart from the very need of housing. The announcements on ECB for affordable housing is a minor respite but still meaningless.

The industry expected a big boost from the budget for affordable housing through special schemes, an interest subvention of 5 to 7% for LIG and EWS housing and promotion of rental housing through tax exemption. But none of these measures were taken note of.

The Finance Minister has neglected real estate sector despite its contribution of 6.5% to the GDP. Interest subsidy on home loans is not enough and cannot help either the EWS (Economically Weaker Sections) of the LIG segment.

In view of absence of any clear cut steps addressing the realty sector the cost of housing will go up. Real Estate sector also faces a grave risk of drying up of liquidity and here again the Finance Minister has not done anything thing to mitigate the crisis.

The exemption of capital gains tax to invest in SME may result in cash flows out of real estate. We definitely expected huge impetus to affordable housing sector which is a dire need from the government’s own sated objective of providing shelter for all and as a measure to boost the economy.

Anshuman Magazine, Chairman & Managing Director

CBRE South Asia Pvt Ltd

This budget was as per expectations which were low. No bold economic announcements were made which is the need of the hour. However the budget did have some positives including:

• External commercial borrowing for low cost housing projects besides road construction and power.
• Extension of interest subvention scheme for low cost housing
• Investment of up to INR 50 lakh crore in the 12th five year plan, with half of this from private sector for Infrastructure development
• Service tax exemption on low cost mass housing up to an area  of 60 sq. mtr.
• Increasing the limit of tax free bonds for financing of infrastructure projects from INR 30,000 crores to INR 60,000 crore in 2012-13
• One year extension of sun set clause on tax incentives for infrastructure projects under 80 IA
• 1000 crore allocated for national skill development fund for 2012 – 13
• Full exemption from import duty on certain categories of specified equipment needed for road construction, tunnel boring machines and parts of their assembly.
• Allocation of 5000 crore exclusively for creating warehousing facilities under RIDF

However, the following were not considered:

• Increasing the tax exemption limit on home loan interest
• Tax reforms for SEZ’s
• FDI in retail as well as further FDI reforms in real estate
• Industry status for townships, mass housing projects, industrial parks, etc.

Overall the budget was a balancing act when bold steps were required. Reforms in the insurance sector, banking, retail and manufacturing, besides clear implementation structure for Direct Tax code, are required urgently. I hope post budget the Government focuses on timely implementation of infrastructure projects and various other schemes announced in the budget and more importantly announce major economic reforms required to stimulate the economy for a higher growth.

Pranab Datta- Managing Director & Vice Chairman of Knight Frank India

Overall this budget does not have much to look forward to. With reference to the real estate sector, there is an absence of any intent to address the issues concerning the sector. High property prices and low demand coupled with tight lending scenario has further postponed the ambition of owning a house.

Amongst other challenges for the sector, unprecedented rise in urbanization is a challenge as well as an opportunity; however, the lack of road map will prolong the problems of the urban centers. The residential segment has got some attention in terms of fund allocation to rural housing and ECB window for affordable housing projects.

Higher allocation for infrastructure and rural oriented scheme should have a positive cascading effect on the economy. Thankfully, residential leases have been kept out of the ambit of service tax.”

Anurag Mathur, Managing Director, Cushman & Wakefield India

Whilst there is not much incentive provided to the general housing buyers other than a token increase in tax exemptions, the positive aspect of the budget it that it has increased support to affordable housing sector in the form of enhanced budgetary support and institutional support by creation a Credit Guarantee Trust Fund and allowance of ECB in affordable housing. This is a welcome initiative.

Moreover the increase in allocation (and widened scope for private sector participation) in infrastructure implies a clear intent on enhancing the urbanization process as well as providing a support to the slowing industrial sector. This will mean an indirect impetus to real estate creation as well. At the same time the increase in the service tax from 10% to 12% would lead to additional burden on the tenants as the service tax on rentals has remained unchanged.

The IT sector would have also expected a more favorable treatment. The uncertainty over implementation of DTC was somewhat expected, as was the lack of firm commitment over FDI in multi-brand retail. The GST regime which is proposed to be implemented from August 2012, is a welcome step for modernizing the tax-system. Overall, the budget has carried forward the government’s cautious approach from the previous year.

Nandita Tripathi, Director-Tax and Regulatory Services, KPMG 

Budget 2012 aims to boost affordable housing by allowing ECBs at reduced TDS of 5%, enhancing capex deduction to 150% and extending 1% interest subvention scheme by a year. A key change is levy of TDS on immovable property transactions, with a clear intent to counter unaccounted money issues. On indirect tax front, increase in Service tax and Excise duty to 12% may prove to be detrimental for the sector

Anshul Jain, CEO, DTZ India

Overall an average budget. No significant changes that will impact the real estate sector – especially the housing sector. The Union Budget today along with the 75 bps cut in CRR cut last week do not lend any major cheer to the real estate sector. Although the CRR cut does lend liquidity to the market, however, if there are no takers, then there is little utility to such measures. Till such time the interest rates (repo rates) are cut, no major development can be expected in the real estate sector.

After this month’s RBI Credit Policy, it may not be foregone conclusion that interest rates will be cut in April. This sector still needs at least a 100 bps reduction in rates to encourage home buyers and builders to approach banks to raise funds.

The Impact on the Housing Sector

The Good

1.       Change in direct tax slabs. Enhancement of the exemption limit for the general category of individual taxpayers from INR 180,000 to INR 200,000 this year .

New Tax Slabs:

·         Till 2 Lacs – Nil

·         2 Lacs to 5 Lacs – 10%

·         5 lacs to 10 lacs – 20%

·         Above 10 lacs – 30%

Impact: Marginal Increase in disposable income in the hands of common man. While it may not drastically enhance affordability for residential demand, the initiative will at least provide some improvement in sentiments.

2.       Extension interest subvention of 1 percent on housing loans by extending it to housing loan upto INR 15 lakh where the cost of the house does not exceed INR 25 lakh.

Impact: The announcement is unlikely to have any major impact on demand across major Tier 1 cities like Mumbai, NCR, Bangalore, etc, owing to prevalent high property price. However, affordable housing segment in Tier 2 and Tier 3 cities will benefit from this concession.

3.       Affordable housing, being part of negative list,  exempted from service tax.

Impact: This announcement will give a boost to the affordable housing segment.

The Bad

1.       Service tax increased from 10% to 12%.

Impact: A significant part of sale value of a home consists of various taxes such as excise, VAT, service tax, and stamp duty. Increase in the service tax is going to further increase (marginally) the overall burden on the home buyers of mid and high segment (dwellings costing more than 25 lakhs). Roughly translates into INR 40,000 on a 75 lakh home.

In addition to marginal change in direct taxes, there has been no announcements on increasing cap on interest payments (currently at INR 150,000) and principal payments (currently at INR 100,000). This was a major demand from developer and individual community.

Brotin Banerjee, MD & CEO, Tata Housing

The Union Budget 2012-13 throws up a mixed bag for the real estate sector. The Government’s initiative to make affordable housing available to a larger section of the society has only been met partially. Initiatives such as External commercial borrowing for the affordable and low-cost housing segment will help the sector to tap long-term funds and help ease the liquidity in the sector. Extension of the 1% interest subvention scheme for affordable housing will help the buyers to avail a loan limit of Rs.25 lakh. Also the measures to increase funding for highways and other infrastructure will help put more territories on the real estate map.

However, the demand of increase in the limit on tax deduction available on home loans interest from current Rs 1.5 lakh remains unanswered. The Union budget has no real measure for the real estate sector as most of the industry expectations have not been met. The most important demand across all real estate companies that of an industry status being assigned to the sector has been long pending as well.”

Paras Gundecha, President, MCHI – CREDAI

The real estate industry is dissatisfied with the Union Budget for 2012-13 and calls it a lackluster and directionless document. The industry that contributes about 6.5% to GDP was expecting a lot from the Finance Minister in terms of support to both the home buyer and developer community. But sorry to say that the Finance Minister has disappointed all of us.

The measures like allowing ECB for affordable housing will only have a cosmetic impact since the definition of affordability has changed. The government’s definition of affordable housing does not cover much of the society in land-starved cities like Mumbai.

The Finance Minister did not address the root cause of the high rise on cost of construction – the ever increasing cost of inputs like cement, steel, labour and multiple taxation. “We were honestly expecting some measures aimed at bringing about reforms in the real estate sector and even granting status of industry to it, but there is nothing but disappointment in this budget.

We fail to understand as to how long the government will continue to ignore the capital and labour intensive sector. Much of the economic policy in the States depends on directions from the Centre and the Union Budget and this year’s budget has failed in this aspect as well.

Om Chaudhry, CEO FIRE Capital and Chairman, Astrum Homes

Another lost opportunity by our Finance Minister, who could have done significant lot to drive the consumer demand for real estate and turn the fortunes of the sector and in turn give a fillip to GDP growth in 2012-13.

While he mentioned that the objective of the budget was to create conditions for growth and to focus on domestic demand driven growth recovery, however he gave the real estate sector , which could have helped him meet these objectives, a miss.

The real estate sector holds significant prominence as its contribution to the Indian GDP is bound to grow beyond 6%. Housing sector has linkages to more than 250 ancillary industries and employs more than 10% of our workforce. Having said that, industry, which is undergoing stress, was in immediate need of several concessions and support measures on easing of liquidity, relaxation of high tax structures and policy stimuli to facilitate a more congenial regulatory and development environment.

High costs of inflation and financing has choked demand and supply situation that is leading to a significant demand glut and impacting the social living conditions especially in fast growing geographies.

Nonetheless, a positive step forwards has been to allow foreign debt funding in affordable housing. Thankfully, which has been acknowledged by the government as housing is as much a critical need as food and education, two areas where government is quite proactive otherwise.

By not rolling back the 1% interest subsidy government has again upheld the need for state intervention in the affordable segment. Well it does miss the point of how inflation has taken that slab from 10 lakhs to somewhere close to at least 50% higher than that. This also happens to be a segment which gets easily impacted by interest rate fluctuations. So a wider scope and a stronger support mechanism could have been much appreciated.

Hike in indirect taxes will definitely impact the cost of delivery of real estate impacting overall demand. Further, shifts in tax slabs are too small to influence incremental demand.

No other positive measure to lend higher vibrancy into this sector was introduced or mentioned by Mr. Pranab Mukherjee. Any step towards attracting more FDI into the sector through relaxation of investment and exit norms providing a conducive environment for exits could have gone a long way in getting international interest back into Indian realty.

Rohtas Goel, CMD, Omaxe

The raising of exemption limit to Rs 2 lakh is a welcome sign in such times of high inflation. However, the mood of real estate sector remains largely status quo with no major announcement for the sector. Affordable housing has been stressed upon in the Budget. The allowance of external commercial borrowings (ECB) for low cost affordable housing projects will lower interest cost for developers.

In order to ease liquidity, the Government has also reduced Withholding tax on ECBs for affordable housing from 20% to 5% for 3 years. Besides, 1% interest rate subsidy provided last year for loans towards affordable housing continues this year. In fact, what nullifies the above positivity is an increase in service tax and excise duty to 12 per cent each resulting in an increase in cost of raw material. None of the measures announced today will help in bridging the housing shortage in the country.”

Ashwani Prakash, Executive Director, Paramount Group of Companies

Real estate sector has once again been deprived of the “industry status” which would further deprive the sector of the natural benefits, which it could have availed if given the “industry” status .No doubt the ultimate beneficiary in that case would have been the end users/customers.

Proposed Budget 2012-13 has allowed FDI in affordable housing sector which is likely to increase the fund flow in this area and ease out the real estate sector.

Extension of subvention scheme for another one year is definitely a support for the real estate however increase in loan limits was expected and should have been given by the honorable finance minister to give a respite to the real estate sector

It is also notable that the finance minister has increased the service tax and also the excise duty which would directly make an impact on various inputs of real estate which ultimately is likely to make an impact on the price of the properties

R K Arora, CMD, Supertech Limited

The overall budget for the real estate sector is not a very welcoming one. There are some positives but it again has not addressed some of the long pending demands of this sector. The Proposed Budget 2012-13 has allowed borrowing from overseas for affordable housing projects is a welcome step. It will definitely bring fund flow and can also boost the affordable housing segment.

The extension of interest subsidy of 1% on housing loans of up to 15 lakh is a positive step but an increase on housing loans of up to 25 Lakh will further boost the demand for low-cost housing and will help buyers at large.The increase of service tax and the excise duty would directly make an impact on real estate sector which ultimately have an impact on the price of the properties and will affect the customers. Also our long pending demand to give industry status to real estate sector once again has not been addressed.

Anuj Kumar Choudhary, Director, Panchsheel Buildtech

Allowing of borrowing from overseas institutions for affordable housing projects is a welcome step. It will increase the fund flow which will help ease out the real estate sector and there can be increase in the affordable housing projects. The extension of the 1% interest subvention scheme for affordable housing will definitely help buyers and it will come as big relief for them. But our long pending demand to give industry status to real estate sector once again has been not addressed.

Deepak Shah, Director, Sumer Group

It’s an unfortunate Budget for Mumbai as it has completely been neglected. The infrastructure development requirements of the city are unprecedented. Moreover, there is no relief for the home buyers in terms of improved tax exemption on capital repayment and interest payment on the home loans. Rather, increase in the service tax will burden the industry with extra cost and hence the home buyer taking away hopes of improvement in the real estate industry.

Ravi Saund, COO, CHD Developers

Infrastructure has taken a centre stage yet again in the reforms in the Union Budget 2012-2013.  The steps to increase funding for roads, highways and other infrastructure will surely add more terrain on the Indian realty map taking tier 2 and tier 3 cities on new growth trajectory. The 1% tax rebate for home loans of upto Rs.15 lakh on homes costing upto Rs. 25 lakh will prove beneficial for developers in the category of residential sector.

Exempting proceeds from the sale of a residential property from Capital Gains tax if they are invested in equity or equipment of an SME definitely provides home owners with more reinvestment options. Companies engaged in infrastructure and affordable housing are in for some heightened activities in the near future as the government opens up funding options for such companies. Allowing External Commercial Borrowing (ECB) for affordable housing is no doubt an admirable move. This will ensure easy access to funds and better capital availability for developers of affordable housing. ECB will attract more developers to enter affordable housing.”

Gaurav Gupta, Director, Omkar Realtors & Developers

 Real estate sector has not received any sops in the current budget which could have boosted the market and customer sentiment.  There were no indications also of this sector being granted  the much deserving industry status . On the contrary , the increase in Service Tax will push up the realty prices as the additional cost will be passed on to the buyers. Increased spending on the infrastructure is welcome step but hope to see much towards urban infrastructure to support the real estate industry.  The move to allow ECB for low cost housing is  a positive step.

Shrinivas Rao, CEO-Asia Pacific, Vestian Global

Residential Sector:  With high borrowing rates and declining sales, the extension of 1% interest subvention scheme for affordable housing is the positive measure of the Union Budget 2012-13 for the realty sector.

Multi Brand Retail: The government has reiterated its commitment to favour multi-brand retail by allowing FDI upto 51 per cent, subject to consensus from the state governments, which is bound to be a time consuming and a challenging process.

To sum it up, union budget 2012 – 13 is a disappointment for real estate sector with issues like uncertainty in SEZ regulations, delay in implementation of Direct Tax Code (DTC) and failing to provide “Industry” status.

Chaitnya Parekh, Chairman & Managing Director, Soham World

The Budget 2012-13 is combined with positive and negatives at the best. It seems fair to state that the Indian real estate sector does not have much to cheer about. There is hope for major improvement but nothing much has been done. No consideration has been given to real estate in this year’s Budget,” he except that the other hand, he pointed out that the external commercial borrowing is allowed.

Raise of 10% to 12% service tax will increase the cost of production for developers, who are already reeling under high input costs, Later this increased burden will be passed on to end users. It is has increased the service tax and also the excise duty which would directly make an impact on various inputs of real estate which ultimately is likely to make an impact on the price of the properties

Jitendra Jain, M.D. & CEO, Neev Group

The relaxation of ECB norms will certainly boost investments in the affordable housing sector, thereby, help to meet the acute housing shortage. The reduction in the rate of withholding tax on external commercial borrowings – from twenty percent to five percent for affordable housing will also give developers easy access to funds and reduce their interest costs. The proposal to extend the 1% interest subvention scheme for affordable housing will continue to benefit the buyers in the affordable housing market for houses worth up to Rs. 25 Lakhs.

 Shailesh Sanghvi – Director of Sanghvi Group

 This union budget has focused on affordable housing by allowing external commercial borrowings (ECB) for low cost affordable housing projects and setting up credit guarantee trust that will give better capital availability for developers of low-cost housing. This is one of the moves that will help in timely project execution resulting in higher volumes .This will lower interest cost for developers and address the housing shortage of this segment. The budget has also extended 1% interest subvention scheme for affordable housing continues houses worth up to Rs. 25 lakhs, however the price band could have been broaden to accommodate units at higher price points.

The budget not granting industry status to the sector comes as a disappointment since the move would have helped raise funds at low rate of interest from financial institutions. Raising of service tax from 10 to 12% is  not a favorable step. Overall the budget is not as per expectations taking into consideration the current scenario of real estate.

Neeraj Gulati, MD, Assotech Realty

By providing external commercial borrowings (ECB) for low cost affordable housing projects, it has helped to lower interest cost for developers. But, we were expecting the budget to be more fruitful for the Real Estate sector. It has ignored various important issues, leading to unfulfilled expectations.

Unfavorable aspects:

·         Last year, a 1% interest rate subsidy was provided for loans towards affordable housing. Realty sector wanted the scope of this subsidy to be amplified and broadened to include a wider price band of budget housing to benefit home buyers, especially in lower income groups. There has been no development on this.

·         There is no legislation on Real Estate Investment Fund (REIT)

·         No implementation of revised DTC to provide the required clarity on the issues that may emerge, and how businesses would be promoted in SEZs.

·         No development of Real Estate regulator to ensure transparency and fair play to create a sense of trust amongst the consumers

·         No relaxed norms for repatriation of FDI in real estate to make the market more investment friendly

Kamal Khetan, Chairman & Managing Director, Sunteck Realty

The Finance Minister’s move to allow External Commercial Borrowing for developers engaging in value housing has pleasantly surprised the sector. This will act as a major boost to the smooth completion of projects that were otherwise inundated with financing woes. Affordable housing segment will now be able to avail of loans at a significantly lower interest. However, this segment had little to rejoice about the non-amplification of the 1% tax rebate that they were anyway recipients of.

The Parliament’s continual refusal to grant the real estate an industry status would mean little access to loans at reasonable interest rates from domestic and foreign markets. An acknowledgment of the same could have made bank financing simpler for realty companies. The hike in service taxwill further increase costs to home buyers.”

Zubin Irani  President (India), UTC Climate, Controls & Security

In my opinion, the Budget bears an average impact on the economy. While the Budget has shown some green signals towards infrastructure growth in India, it has fiscal roadblocks in its way. The planned Rs. 50 lakh crore investments in infrastructure is indeed worth appreciating although separate amendments and provisions for real estate sector would have been welcomed. Also, the proposed investments in health and education sectors will further boost the country’s infrastructure to a large extent.

The fiscal deficit of 5.9 per cent of the GDP in the year 2011-12 has panned out very differently as compared to the target of 4.6 percent which indicates excessive spending by the government to keep up the growth momentum.

Also the hike in excise and custom duties of 2% will not only have a cumulative effect on the cost of construction on a whole but may also impact the revenues of India Inc substantially. With land acquisition prices touching the roof, no rebate in home loans and interest rates and now an additional rise in cost of construction will postpone the ambition of an average home buyer.

One more element that was off the Budget purview was emphasis on green practices and carbon emissions in India. At present the government does not have specific tax benefits or policies for accounting towards the higher costs incurred in green buildings like higher levels of depreciation and tax breaks.  In this direction, some thrust on green construction could have encouraged developers to adopted sustainable practices which in turn would have also helped in lowering the carbon emissions.

To address the fiscal deficit, the indirect taxes have been increased which will strain the nation’s growth.