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Union Budget 2016: Announcements in Real Estate sector
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our comprehensive analysis.
As has been a trend in the recent past, the real estate sector in the midst of softness
and early signs of distress in key markets, had high expectations from the Budget.
While the Budget expectedly does not address all demands of the sector, it still has
enough on the tax front to bring some cheer to the industry. Two key areas that could
boost the sector, namely, affordable housing and Real Estate Investment Trusts
General amendments
GAAR
(‘REITs’), have been given importance from taxation stand point. On the policy front,
International Tax Amendments
the Budget is surprisingly short of meaningful fresh policy initiatives, including on pet
Transfer pricing
projects such as Smart Cities. Also, notably, no announcements were made on the fate
of the Real Estate Bill or on the long standing demand of the sector for ‘infrastructure
status’.
Customs and excise
Key announcements
Policy announcements

Service tax
Central sales tax
GST
An amount of INR 1.5 bn is allocated under ‘Digital India’ initiative for modernization
of land records across states. This is an important initiative and digitization of land
records across the country is a first step towards reduction of litigation and title
insurance.

Proposed policy measures on manufacturing and infrastructure sectors would have
an indirect but definitive impact on the real estate sector. The thrust on road
infrastructure should positively influence the real estate sector by widening existing
zone and creating new zones for real estate developers.

A model Shops and Establishment Bill is proposed which will inter-alia allow shops
to remain open seven days a week. This will have a positive impact on retail
segment of the real estate sector.
Direct tax proposals
Kalpesh Maroo
+91 80 403 20037
[email protected]
Taxation of REITs

To make REITs more attractive to investors, it is proposed to eliminate Dividend
Prashanth Bhat
+91 80 4032 0194
[email protected]
Distribution Tax (‘DDT’) on dividend distribution by project SPVs to the REIT and by
further exempting such dividends for the unit holders from tax, thereby providing a
complete pass through of income in respect of dividend distributions by the SPV.
Gautham Lokande
+91 80 403 20130
[email protected]

Proposed DDT exemption will apply only on dividends to be distributed by asset
owning companies to REIT from income accruing to such companies after the
specified date (the date on which such company was acquired by REIT). Also, DDT
exemption will not be available where shares of the asset owning companies are not
wholly owned by REIT.

Other changes requested by the industry in the form of reduction of period of
holding of units of a Business Trust to qualify as a long term asset from 36 months
to 12 months, clarity on deduction of expenses at the REIT level, etc have, however,
not been accepted.
Impetus to affordable housing

To support Government’s vision of ‘Housing for all by 2020’, it is proposed to
introduce section 80-IBA to allow a 100 percent tax holiday on profits from business
of developing and building eligible affordable housing projects.

Key conditions prescribed for a housing project to qualify for this deduction are:
 Project should be approved by competent authority between June 1, 2016 and
March 31, 2019, and it should be completed within a period of 3 years from the
date of approval;
 Plot of land should be > 1,000 square meters if situated within municipal limits of
Delhi, Mumbai, Chennai and Kolkata or within the 25 kilometres from the
municipal limits of these cities, (‘Metros’), or 2,000 square meters if situated in
other cities;
 Each residential unit should be < 30 square meters if situated in the Metros, and <
60 square meters in case of other cities;
 Utilisation of at least 90 percent of the permissible floor area ratio, if situated in
Metros and at least 80 percent of the permissible floor area ratio in case of other
cities;
 Built-up area of shops and other commercial establishments included in the
project should not exceed 3 percent of total built-up area;
 Where residential unit in the project is allotted to an individual, no other unit are
allowed to be allotted further to the individual or to any other family member; and
 Maintenance of separate books of accounts.
Phase out of tax holidays - Special Economic Zones (‘SEZs’) spared

As part of the overall plan to phase out tax incentives and to move towards a
rationalised corporate tax rate of 25 percent over a four year period, it is proposed to
introduce sunset dates for various tax holiday schemes.

Discussion paper released by the Government earlier suggested a sunset date of
March 31, 2017 for both SEZ developers and SEZ units. The sunset date for SEZ
units has been extended and accordingly SEZ units that are operationalized by
March 31, 2020, would be eligible for tax holiday under section 10AA. The
extended sunset date for SEZ units would provide the SEZ developers a three year
window to complete development and bring in units into the SEZ.

Developers are to be eligible to claim the tax holiday provided they commence
development of SEZ before April 1, 2017.
Tax incentives to home buyers

To incentivise first time home buyers, an additional deduction of INR 50,000 has
been proposed in respect of interest on housing loan availed for the purpose of
residential house property. The deduction would be applicable in respect of loans
not exceeding INR 3,500,000 and availed between April 1, 2016 and March 31,
2017, for purchase of house property having value of not more than INR 5,000,000.

Further, there has been rationalisation of existing provisions enabling the claim of
housing loan interest deduction. The time limit for completing the construction of the
house property, which was 3 years from the date of availing the housing loan, is
proposed to be increased to 5 years.
Other significant amendments

For determining value of consideration under section 50C, in cases where date of
the agreement fixing the amount of consideration for transfer of immovable property
and the date of registration are not the same, the stamp duty value on the date of
agreement would be considered, provided the sale consideration is fixed under an
agreement executed prior to the date of registration of the immovable property.

Existing limit for house rent exemption for individuals who are not in receipt of house
rent allowance from employers, is proposed to be enhanced to INR 5,000 per month
by amending section 80GG.
Indirect tax proposals
Change in abatement rate for construction services with effect from April 1, 2016

Presently, abatement of (i) 75 percent of the amount charged in case of a residential
unit having carpet area < 2,000 square feet and costing < INR 10 mn; and (ii) 70
percent of the amount charged in case of others (residential or commercial units) is
prescribed, subject to fulfilment of certain conditions.

With effect from April 1, 2016, the percentage of abatement is proposed to be
70 percent, uniformly in all cases, irrespective of size and cost of residential or
commercial units
 Taxable value would hence be 30 percent of amount charged resulting in an
effective service tax rate (including Swacch Bharat cess) of 4.35 percent.
 The condition that no credit should be availed and that value of land is included in
the amount charged from service recipient continues to be applicable.
Krishi Kalyan Cess to be levied on any or all taxable services with effect from
June 1, 2016

Krishi Kalyan Cess at 0.5 percent is proposed to be levied and collected, as service
tax, with effect from June 1, 2016 on all taxable services, in addition to service tax
(14 percent) and Swacch Bharat Cess (0.5 percent). All provisions of the Finance
Act, 1994, and related rules (service tax law) would apply to this levy.

Consequently, effective service tax rate, including Swachh Bharat Cess and Krishi
Kalyan Cess would work out to be 6 percent for works contract services and 4.5
percent for construction services.

Credit of Krishi Kalyan Cess paid on input services is proposed to be allowed for
payment of the cess by a service provider on his output services.
Exemption to service tax for low cost houses under Pradhan Mantri Awas Yojna
(‘PMAY’), with effect from March 1, 2016

Service tax exemption extended to services by way of construction, erection,
commissioning or installation of original works pertaining to low cost houses up to a
carpet area of 60 square meters per house in a housing project approved by the
competent authority under:
 The ‘Affordable housing in partnership’ component of PMAY; or
 Any housing scheme of a State Government.

Service tax exemption extended to services by way of construction, erection,
commissioning, installation, completion, fitting out, repair, maintenance, renovation
or alteration of original works of a civil structure or any other original works
pertaining to:
 ‘In-situ Rehabilitation of existing slum dwellers using land as a resource through
private participation’ component of Housing for All (HFA) (Urban) Mission / PMAY,
only for existing slum dwellers; and
 ‘Beneficiary-led individual house construction / enhancement’ component of HFA
(Urban) Mission / PMAY.
Excise duty exempt for ready mix concrete (‘RMC’) manufactured at construction site

The Supreme Court in the case of L&T (2015) held that that RMC is different from
concrete mix and exemption is available only for concrete mix manufactured at site.

With effect from March 1, 2016, the exemption presently available to concrete mix
manufactured at site for use in construction work at such site is proposed to be
extended to RMC:
 For the purpose of this entry, the expression ‘site’ is defined to mean any premises
made available for manufacture of goods by way of a specific mention in the
contract or agreement for such construction work, provided that the goods
manufactured at such premises are solely used in the said construction work only.
 No relief is provided for the past periods.
Restoration of exemption of construction related services provided to Government,
earlier withdrawn from April 1, 2015

It is proposed that the exemption for construction, repair, maintenance, renovation
or alteration service provided to the Government, a Local Authority, or a
Governmental Authority for contracts entered into prior to March 1, 2015 and on
which appropriate stamp duty has been paid prior to that date, be restored in the
following cases with effect from April 1, 2015 till March 31, 2020:
 Civil structure or any other original works meant predominantly for use other than
for commerce, industry, or any other business or profession;
 Structure meant predominantly for use as (a) an educational, (b) a clinical, or (c)
an art or cultural establishment; or
 Residential complex predominantly meant for self-use or the use of employees or
other persons specified in the Explanation 1 to clause 44 of section 65B of the
Finance Act, 1994.

Refund claims can be filed for service tax paid on above contracts for the period
April 1, 2015 to February 29, 2016, within six months of the Finance Bill 2016
receiving Presidential Assent.
Services provided by Government or local authority to a business entity liable to service
tax under reverse charge mechanism

Services rendered by the Government or the local authority to a business entity
would be liable to service tax under reverse charge basis, with effect from April 1,
2016, except for the following services:
 Services by the Department of Posts by way of speed post, express parcel post,
life insurance and agency services provided to a person other than Government;
 Services in relation to an aircraft or a vessel, inside or outside the precincts of a
port or an airport; and
 Transport of goods or passengers.
Conclusion
All in all, Budget 2016 seems to have some positives for the real estate sector
especially on the tax front. Specifically, the proposed DDT exemption to REITs and the
tax holiday scheme for affordable housing projects can be seen as measures that would
trigger reasonable momentum to the otherwise subdued sector.
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Tel: +91 22 6135 7000 | Fax: +91 22 6135 7070
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