REAL ESTATE

Budget 2008—RE Impact

INTRODUCTION
The Indian real estate industry witnessed heightened activity in
2007, characterized by massive development, sustained end-user
demand, and increased interest from international players. Over the
past few years, the Indian real estate industry has grown at an
unprecedented rate of 30% and is expected to grow at over 21% for
the next three to four years. According to the research by Deutsche
Bank, the industry is expected to grow from USD 48 billion in FY07
to USD 140 billion by FY12 (CAGR of 21%). The year 2007 saw
sustained end-user demand in all segments of the industry, fuelled
by buoyancy in the economy, favorable demographics, increasing
urbanization, and rising income levels.
In 2007, there was a sharp increase in the number of real estate
companies tapping the capital market. About nine real estate
developers raised close to INR 142 billion in 2007 through initial
public offerings. Private equity funding has also boosted the real
estate industry.
On the regulatory front, the Urban Land Ceiling and Regulation Act
(ULCRA) was repealed by the Maharashtra Government. As per
industry sources this could potentially unlock approximately 74,000
hectares of land in Maharashtra. Also, the Securities and Exchange
Board of India issued draft guidelines with respect to Real Estate
Mutual Funds, which could pave the way for small investors to
leverage investment opportunities in the sector.

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BUDGET 2008—RE IMPACT

Economic Survey 2007–08:

Key Highlights
In the backdrop of over 8% GDP growth rate at market prices during the last
five years, the economic survey outlook is optimistic with caution as the
catch-word. The Economic Survey 2007–08 (the Survey) states that the
Indian Economy has moved on to a higher growth trajectory, riding on robust
macroeconomic fundamentals. Though, the projected GDP growth rate for
FY08 has reduced to 8.7% from 9.6% for FY07, the Survey is confident of
achieving the average GDP growth target of 9% during the Eleventh Five
Year Plan (2007–12). The Government successfully contained inflation
during the year, despite the hardening of global commodity prices and
increasing foreign funds inflow. Rupee appreciation, slowdown in the
consumer goods industry, and infrastructure (both physical and social)
constraints still remain a concern. In order to achieve double digit GDP
growth the Survey has suggested additional reforms, including increasing FDI
caps in certain sectors.
Some of the key highlights related to the real estate industry in the Economic
Survey 2007–08 are:
Ø Growth drivers: Favorable demographics, increasing income levels,
growth in the services and tourism industries are fuelling the growth in
the real estate industry.
– The growth in per capita income has increased to 7.2% in FY08.
The average per capita income for the last five years is also 7.2%,
implying that the average income levels could double in a decade.
– India is expected to benefit from the ‘demographic dividend’, as
the working age population (15–64 years) is expected to increase
steadily from 62.9% in 2006 to 68.4% in 2026. While most
developed countries are facing an aging population, India’s young
workforce will be an added advantage. This demographic
dividend could lead to higher growth for the real estate market.
Ø Tourism: The Indian tourism industry is growing at a rate higher than the
world average. The industry has witnessed double-digit growth in both
number of foreign tourist arrivals and foreign exchange earnings
therefrom for the last four years. The foreign tourist arrivals in India
grew at a CAGR of 16.5% during the period between FY04 and FY07,
while the foreign exchange earnings from tourism during the same
period has grown at a CAGR of 24.4%. The overall development of
tourism infrastructure coupled with efforts by the Government to
promote the industry will further facilitate this growth.
Ø Real Estate Housing Index: For the first time in the Survey, the National
Housing Bank (NHB) presented the Housing Price Index (HPI) that
tracks the movement of residential property prices in five cities
(covering New Delhi, Mumbai, Bangalore, Kolkata and Bhopal). Over
the past five years, the housing prices in these five cities have increased
in the range of 12.1% (in Kolkata Municipality Area) and 28.8% (in
Bangalore) per annum on an average basis. NHB plans to release an
economy wide HPI on a regular basis.

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Ø Credit to real estate: Housing loans up to INR 2 million have been
included in the broad category of priority sector for scheduled
commercial banks (SCB). The other categories in priority sector
include: agriculture (direct and indirect finance), small enterprises
(direct and indirect finance), retail trade, micro-credit, and education
loans.
– Credit to housing loans expanded by INR 455.08 billion in
FY07 (of which housing loans under priority sector were INR
286.32 billion) compared to INR 512.73 billion in FY06 (of
which housing loans under priority sector were INR 429.02
billion).
– Credit to real estate by SCBs expanded by 41.5% at the end of
March 2007 compared to 78.7% growth at the end of March
2006.
– The share of real estate in the total credit extended to sensitive
sectors continued to remain high at 91.9%.
Ø Special Economic Zones (SEZ): The SEZ Act came into effect in
February 2006. Since then 439 formal approvals have been granted in
22 states across 23 sectors, of which 195 SEZs have been notified and
are at various stages of operation.
– There has been a steady increase in exports from SEZs, which
increased from INR 228.40 billion in FY06 to INR 346.15
billion in FY07. Exports from SEZs for FY08 have been
projected to be INR 670.88 billion.
– So far private investments in tune of INR 71.04 billion have
been made in 19 SEZs which were set up prior to the
establishment of the SEZ Act. About INR 673.47 billion have
already been invested in the newly notified SEZs.

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BUDGET 2008—RE IMPACT

Union Budget 2008 : Impact

Direct Tax impact:

Ø No change in corporate tax rates except, short term capital gain tax
on transfer of equity share in a company and unit of equity oriented
fund (where such transfer is chargeable to securities transaction tax)
increased from 10% (plus surcharge and education cess) to 15% (plus
surcharge and education cess).
Ø Threshold limits on individual tax slabs increased, thereby resulting
in reduced tax burden.
Ø 100% tax holiday for 5 years under section 80IB to undertakings
engaged in operating and maintaining hospitals located anywhere in
India (except metro cities and certain other specified cities), provided
hospital is constructed and starts functioning during the period 1
April 2008 and 31 March 2013.
Ø 100% tax holiday for 5 years under section 80ID extended to hotels
(2, 3 and 4 star category) located in specified districts having a
World Heritage Site, provided hotel is constructed and starts
functioning during the period 1 April 2008 and 31 March 2013.
Ø Loan received by senior citizens in a reverse mortgage transaction
under a scheme made and notified by the Central Government
exempt from income tax and capital gains tax.
Ø Cascading effect of Dividend Distribution Tax (DDT) reduced up to
one level. A domestic parent company now permitted to reduce the
amount of dividend received from its subsidiary provided subsidiary
has paid DDT on such dividend and domestic parent company is not
a subsidiary of any other company.
Ø No tax regime proposed for Real Estate Investment Trusts.
Ø While calculating book profits for computation of Minimum
Alternate Tax, Deferred tax, DDT, interest (on tax), surcharge and
cess charged on income tax are to be added back to net profit.
Ø Due date for filing of return of income and fringe benefit tax by
companies advanced from 31 October to 30 September, following
end of the relevant financial year.
Ø Securities Transaction Tax paid by an assessee on taxable securities
transactions entered in the course of business allowed as a deduction
from business income. Earlier, the same was eligible to be reduced
from tax liability.
Ø Post expiry of tax exemption period, the depreciation for tax
purposes would be computed on the actual cost of the asset as
reduced by the total amount of depreciation claimed in the books.
Any impact of revaluation on the cost of assets or depreciation
thereof is to be ignored.
Ø Banking Cash Transaction Tax withdrawn from 1 April 2009.

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Indirect tax impact:
Customs duty
Ø No change in peak rate of basic customs duty.
Ø Decrease in customs duty rate on imports under Project Import
Scheme from 7.5% to 5%.
Excise duty
Ø General rate of excise duty reduced from 16% to 14%.
Ø Excise duty revised on bulk cement from INR 400 per tonne to 14% of
assessable value or INR 400 per tonne, whichever is higher.
Ø Excise duty on cement clinkers increased from INR 350 per tonne to
INR 450 per tonne.
Ø Cenvat Credit Rules amended to provide that capital goods used for
providing output service can be used outside the premises of output
service provider without any time restriction.
Service tax
Ø No change in service tax rate.
Ø 7 new taxable services included in the service tax net.
Ø Threshold limit for small assessees increased from INR 800,000 to
INR 1 million.
Ø Permitting use of space in an immovable property has been clarified as
being liable to service tax, irrespective of the transfer of possession or
control of the immovable property.
Ø Service tax rate under the optional composition scheme provided for
payment of service tax in relation to specified works contracts
increased from current rate of 2% to 4% of total value of the contract.
Central Sales Tax (“CST”)
Ø Concessional rate of CST to be reduced to 2% from 1 April 2008,
subject to the States agreeing to a compensation mechanism in lieu of
the reduced rate.

Sources:
1. “India Property: Shifting sands create entry opportunities”, Deutsche Bank, 3
September 2007, via Thomson Research
2. “Economic Survey 2007–2008”, Union Budget & Economic Survey Website,
http://indiabudget.nic.in, accessed 28 February 2008
3. “Union Budget 2008–2009”, Union Budget & Economic Survey Website,
http://indiabudget.nic.in, accessed 29 February 2008
4. “Report on trend and progress of banking in India 2006-07”, Reserve Bank of India
Website, http://rbi.org.in, accessed 29 February 2008
5. “Realty stocks turn a new leaf in 2007”, The Hindu Business Line, 1 January 2008

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