Finance has unequivocally been the biggest challenge for the real estate sector of India. Hardening of interest rates has a major impact on the borrowing costs of the developers. At the same time, it has affected demand for real estate, which is largely driven by bank finance.
The real estate sector was looking forward at the Budget 2012 to come with some major policy decisions, such as the long standing demand of granting realty sector an industry status, which would have eased the borrowing cost and avenues for raising funds for the developers; an upward revision of the present limit of Rs. 1.5 lakh on interest cost deductibility on self-occupied houses; re-introduction of profit based deduction for affordable housing and to exclude real estate development from the purview of service tax.
General Anti-Avoidance Rule (GAAR)
Mounting levels of fiscal deficit in the Indian economy has put tremendous pressure on the Finance Ministry. In order to control it the income tax authorities have adopted a pro-revenue attitude like never before.
The Supreme Court (SC) settled, what was arguably the most eagerly tracked tax litigation in recent times, the case of Vodafone International Holdings BV vs. Union of India, wherein the SC held that an indirect transfer would not be taxable in India. However the Finance Act 2012, with retrospective effect from 01 April 1962, amended section 9 of the Income-tax Act, 1961 (ITA) to tax the indirect transfer of an asset in India.
Also with the inclusion of GAAR in the ITA (the applicability of which is deferred by one year), the tax authorities have been granted the wide ranging powers with respect to certain kinds of transactions if the main purpose or one of the main purpose of a transaction of a part of the transaction is to avail tax benefit. The introduction of GAAR by the Budget 2012 was widely criticised internationally. One of the biggest concerns was that onus of proving lack of tax avoidance was on the assesse.
However, the FM has assured that the onus would be on the department. There would be more clarity as events unfolds from now till the next fiscal when GAAR becomes applicable and the guidelines are framed for its application. The success of an anti-abuse measure lies in astute selection and vigilantly supervised employment. The real estate sector will have to bear the brunt of GAAR as due to business and regulatory (such as land ceiling) needs, the transactions are structured in a manner that involves several steps and/or entities. One only hopes that there would be some free play in the joints and the unassailable evidence of commercial prudence for each transaction is not required to be maintained.
The recent growth in the Indian economy has stimulated demand for land and developed real estate across the country. Taking into consideration the rising demand for residential, commercial and retail real estate, the Finance Bill 2012 had proposed insertion of section 194LAA in the ITA to deduct tax by way of TDS @ 1% on consideration for transfer of immovable property (other than agricultural land) if the value of the property exceeds Rs. 50 lakh in urban areas and Rs. 20 lakh if the property is situated in any other areas.
The genesis behind such proposed amendment seems to be to reduce the flow of black money in the market and ensure reliable data collection, apart from collection of tax at the earliest point on transactions of immovable properties. However the proposal was dropped deferring to the plea that it will put extra compliance burden on the consumer.
Real Estate (Regulations & Development) Bill, 2011
Of late, the Government reintroduced the Real Estate (Regulations & Development) Bill, 2011, the exposure draft of which was available for comments. The bill seeks to establish the Real Estate Regulatory Authority for regulation and planned development in the real estate sector. The objective of the Authority shall be to take all possible measures for the growth and promotion of a healthy, transparent, efficient and competitive real estate sector.
The Bill also provides for establishment of an Appellate Tribunal to adjudicate disputes and hear appeals from the decisions or orders of the Authority.
In overall, the efforts of the Government are otherwise laudable and the consumer would benefit by increase in transparency and regulations. However, there is a need for reforms on the matters related to land title and registration. Without the digitisation of land records, the condition itself may be ineffective. Further, though a mechanism for registration within 30 days has been introduced in the Bill, there may be a reduction of supply due to delayed and denied registrations.
Major amendments by the Finance Act 2012 ? Real Estate
The slabs for individual taxation have been raised only a little bit and the consequent tax saving will be too insignificant to provide additional funds to young first time home buyers, whose share in the customer base of residential real estate is increasing. Transfer pricing provisions, which were thus far applicable only on international transactions, would now be applicable on specified domestic transactions between related parties. Now transactions with the related parties will have to be benchmarked to demonstrate that they are at arm?s length.
In the last year 100% upfront deduction of capital expenditure incurred prior to the commencement of business of ?developing and building a housing project under a scheme for affordable housing formed by the central government or a state government? was introduced.
Real estate development (especially housing which has a sale model) is capital intensive but the investment is not a ?Capital expenditure?. Realising this, now a weighted deduction of 150% of capital expenses has been introduced. The Income Tax rules provide that for a project to qualify under affordable housing scheme, it has to fulfil certain conditions.
Further, realising the need to fund low-cost housing and in order to make the scheme of affordable housing more feasible, the Government extended the benefit of External Commercial Borrowing (ECB) to affordable housing project. Further the budget also extended a beneficial rate of only 5% on interest to non-residents who fund such projects. Affordable housing thus continues to be the focus of the Government. An enhancement in the scope of deduction for the business of developing and building housing project under the scheme for affordable housing framed by the Government will lead to a consequent increase in the investment in this sector. The rate of service tax and excise has been increased. It is anticipated that the increase in the rate of excise on steel and cement (along with the increase in service tax) will push the price, by approximately 1.5%. With the ever increasing inventory, the industry may find it difficult to pass on the additional tax cost to the consumer.
Floor Space Index (FSI)
The Planning Commission in its recent report has recommended vertical growth of Indian cities by selectively providing additional FSI beyond the permissible index at an extra charge of at least 50% of the area/ circle rates.
In the present scenario, FSI values in India vary from city to city however on an average it ranges between 1 and 4 (including all product mix ? residential, commercial, retail etc.). However, this is far below considering other cities in the world; for example FSI in New York and Manhattan is 15, in Shanghai it is 13.1 and in Hong Kong (Central Business District area) it ranges up to 15.
With respect to Indian cities, the concept of low rise-low density has worked well considering the fact that sufficient land was available for horizontal growth. However with the exponential population growth and limited availability of land parcels for urban/ rural sprawl, going vertical with high rise-high density seems to be an optimal solution. But this underlines the need for increased and stronger infrastructure considering additional load on services such water, electricity, sewage, parking and most important security.
Urban planning in India, which is largely based on low rise-low density principle, has now led to either sprawl or even worse, a situation of informal densification without any supporting infrastructure. However, in smaller cities the prescription of setbacks and building height generally governs the built up area. The first consideration of low FSI in Indian cities has been the prevailing carrying capacity of basic amenities such as water, power, drainage, parking, transport and communication, and the second has been that low FSI shall limit the population size of the city. Despite all shortcomings, the cities kept growing. Extraordinary low FSI in certain cities like Mumbai and Delhi has even led to an artificial increase in the land prices and rental values. Various cities have tried different mechanisms to increase FSI and in turn devise a system to improve the spending for infrastructure development to cater to the needs of additional population coming in the area due to the result of increased FSI.
Mumbai:
TDR concept The transfer of development rights (TDR) concept was introduced in Mumbai through regulation no. 34 (Appendix VII) in the Development Control Regulations for Greater Bombay 1991. Need for TDR in Mumbai The urban local body, the Brihanmumbai Municipal Corporation (BMC), is responsible for the development and provision of public amenities as per the provision of 12th schedule of 74th Constitutional Amendment Act. Due to finance-related constraints, BMC could not acquire land for public amenities from private owners. In a few cases the corporation attempted to provide monetary compensation to the owner in lieu of the land acquired but that was felt to be inadequate. Hence the concept of TDR was introduced as an alternative to monetary compensation. To rehabilitate slums, the Government of Maharashtra introduced TDR as an incentive to attract developers to the slum redevelopment scheme and slum rehabilitation scheme where an owner or a builder redevelops slums free of cost and gets TDR as an incentive.
Permissible FSI
The permissible FSI, including the TDR on a plot, has a maximum capping of 2. The permissible base FSI in the suburbs was 1 with a balance of 1 to be utilised for TDR. The base FSI has been increased from 1 to 1.33, hence reducing the TDR component to 0.67. The additional 0.33 FSI can be utilised on a payment of an amount (30% to 40% of the land value) fixed by BMC. 2. FSI bank: Bandra-Kurla Complex (BKC), ?G? ? Block (Mumbai) ? 2009 An additional built-up space was generated following the government decision to hike FSI at BKC from 2 to 4. The revised availability of built up space in G-block provided 23 lakh square metre of construction space. Under the previous FSI norm of 2, the built up space was 8 lakh square metres. Moreover, this move also resulted in estimated revenue of Rs. 13,000 crore from the sale of extra built-up space.
Andhra Pradesh:
Limitless FSI Andhra Pradesh is one state that does not limit vertical growth and where there is no limit on the FSI. However to check the pressure on the existing infrastructure in the surrounding area an additional fee called the ?Infra Impact Fee? is charged in case a building is required to go beyond the specified height in that particular area as per the building bye-laws. In this case the additional FSI can be built by paying an infra impact fee to the tune of Rs. 30-50 per square feet (on an average, it may differ from area to area). This additional collection by the corporation is then utilised to improve the infrastructure of that area. The change has impacted the skyline of many cities in the state and there is a visible shift from FSI of 1.75 (prior to 2006 ? when the new regulation came into being) to 4 to 6 in peripheral cities and 3 to 4 in cities. Though there can be an endless list to the above, the question still remains the same, are the cities of India ready to go vertical with the existing situation of urban infrastructure?
Land Acquisition and Rehabilitation and Resettlement Bill (LARR), 2011
Development along with urbanisation demands for land acquisition at one point or the other. Considering the scarcity of land and growing pressure on the existing infrastructure, efforts have been to try other initiatives like increasing the FSI or increasing the density in the given areas to cater to growing population, however additional land shall still be required as many cities have reached the threshold of their carrying capacities. To cater to such needs either private parties buy land themselves or government helps in land acquisition particularly for public purposes, however it has never been a smooth process and project affected people have more or less been neglected or under compensated. This has given rise to agitation and in worst situations, it results in stalled projects. With regards to public welfare and development needs, land acquisition has to be a fair mechanism, which ensures that there is no loss of livelihood of the affected people. In order to facilitate land acquisition along with proper compensation mechanism Draft Land Acquisition and Rehabilitation and Resettlement Bill (LARR), 2011 was introduced by the Government.
Under our Constitution, land has been recognised as a State subject however, land acquisition is a concurrent subject. Till date, before the draft LARR was introduced, the basic law governing land acquisition has been Land Acquisition Act, 1894. Although there are 18 other such laws of the central government for land acquisition (like for SEZ?s, railways, defence, highways, etc.), the draft LARR shall enjoy the primacy over such specialised legislations that are currently in force. This draft Bill shall be in addition to and not in derogation of the existing safeguards currently provided for in these laws.
Need for a new Law Though there have been amendments in the original Land Acquisition Act, the principal law continues to be the same which is outdated and requires more focus on the need of the country. There has been no national/ central law to provide for resettlement, rehabilitation and compensation due to land acquisition. LARR, in this scenario, attempts to address the concerns of farmers and those who are dependent on land being acquired and facilitate land acquisition to cater to need of urbanisation, industrialisation and growing demand for infrastructure development.
Scope of LARR, 2011
- Land Acquisition and R& R provisions shall apply under the conditions as below:
- land acquisition by the government for its own use, hold and control
- land acquisition by the government to be transferred to private companies for stated public purpose (including PPP projects but other than national highway projects)
- land acquisition by the government for immediate and declared use by private companies for public purpose b) Only R & R provisions shall be applicable under the conditions as below:
- partial land acquisition by government for private companies for public purposes
- buying of land by private companies on their own for equal to or more than 100 acres Though there have been many checks and balances imbibed in the new Bill to resolve the concerns pertaining to project- affected people, there may be a threat towards notional increase in the land prices as according to the bill it implies ?in case of urban areas the compensation amount would be not less than twice that of the market value so determined and in rural areas it would not be less than six times the original market value?.
Revised Guidance Note on recognition of revenue by real estate developers
The real estate sector in India has been evolving consistently over the past few years. This transition from being a highly unorganised business to an organised sector underlines the need to review varied accounting practices being followed by the real estate companies. The introduction of the ?Guidance Note on Accounting for Real Estate Transactions? by the Institute of Chartered Accountants of India (ICAI) is a step forward in addressing subjectivity and ambiguity in a number of areas, and is all likely to bring uniformity in accounting practices. The Note, which supercedes the existing Guidance Note issued in 2006, will also ensure comparability of financial statements. The objective of this Guidance Note is to recommend the accounting treatment by enterprises dealing in ?real estate? as sellers or developers.
Key changes
The scope of the Guidance Note has been significantly enlarged to capture all models/ structure of transactions including sale of development rights, joint development arrangements and transactions involving exchange of land with developed property. Definition of project: As per para 2.1, a project is defined as ?a group of units/plots/saleable spaces which are linked with a common set of amenities in such manner that unless the common amenities are made available and functional, these units/ plots/ saleable spaces cannot be put to their intended effective use?. A larger venture can be split into small projects if the basic conditions as set out. The pre-conditions to be satisfied for Revenue Recognition are as follows:
- all critical approvals necessary for commencement of the project have been obtained
- expenditure incurred on construction and development is higher than 25% of the construction cost (excluding land cost)
- at least 25% of the saleable project area is secured by eligible contracts or agreements
- at least 10% of the total amount collectible in respect of an agreement to sell (ATS) has been so collected at reporting date
Revenue should be recognised for ?legally enforceable contracts? only when there are no outstanding defaults of the payment terms in such contracts. Way forward Transition: long term projects where even a small portion of revenue has been recognised before 1 April 2012, will be continue to be accounted for on the basis of the existing guidance note. For the initial years, the companies may have to keep two separate revenue recognition computations ? for projects pre and post the implementation of the revised GN Project: Identification of common set of amenities within a project would be key for evaluating the project definition. Resultantly any reassessment of project definitions may lead to significant changes in the revenues/ profit calculations. Payment defaults: It is not clear if post balance sheet date defaults or payments to be considered. A complete track of the defaults made by the customers need to be maintained on a real time basis. Recognised revenues may result in subsequent reversal adjustments as a result of delayed cash inflows.
Impact on the tax assessments: One of the key considerations of this change should be acceptability of the proposed accounting principles by the income tax authorities. Communication with stakeholders: On deferral of revenue, some of the debt covenants may get broken. Time and effective communication with different stakeholders is going to be a key in managing the transition to the new accounting rules.
Delhi Master Plan 2021
Urban planning is core to the development of sustainable cities, which have sufficient resources and infrastructure to support continuous increase in population. The steps leading to the creation of sustainable cities need to be augmented with provisions for adequate and sustainable human settlements and services to support rapid urbanisation. In recent times, the phenomenal rate of urbanisation and migration has exposed cities to the challenges of urban planning and governance. Suffering from a lack of urban infrastructure, cities succumb to the issues emanating from the proliferation of urban slums, squat and informal settlements.
Following the enactment of the Delhi Development Act 1957 to streamline the process of planned development in the national capital, the Government drew up the Master Plan of Delhi in 1962. Widely considered as one of the first steps towards modern planning in India, the Plan was prepared with a perspective of 20 years. In order to cater to the changing requirements of the city, the Plan was amended under Section 11A of the DDA Act.
Known as the Master Plan 2001, the modified Plan was approved by the Government in 1990. Further, the Government undertook the modification and revision of the Master Plan 2001 to develop an urban plan that was integrated with the projected need of housing in the national capital. This Plan, which is commonly known as the Master Plan 2021, was notified on 07 February 2007.
With the passing of the National Capital Territory of Delhi Laws (Special Provisions) Second Bill, 2011, the deadline of finalising policies for achieving the Master Plan?s targets have been extended for three years to 31 December 2014. The Ministry of Urban Development plans to utilise the extended time buffer provided by the Bill to review the Master Plan 2001, and modify it to chart an urban plan that complies with the pace of increasing population in the city in the next 25 years.
To develop a visionary plan that supports the development of the national capital as a global metropolis, the Government is also using remote sensing and GIS (Global Information System) tools. The mapped data would be used to ascertain the pattern of increasing population, and detect and prevent encroachment on public land. Further, the data will be consistently updated in order to monitor the success of the Master Plan. The Master Plan also aims at delineating policies especially targeted for the protection of green belts and conservation of heritage infrastructure of Delhi.
The Plan also intends to explore the Floor Area Ratio (FAR) laws to optimise the monetisation of the available land, innovative models of Public Private Partnership (PPP), etc. As part of the initial review of the Plan, the prevailing guidelines for land use, floor area allotment, regulation in influence zone along metro lines and industrial areas, notification of new commercial and industrial areas, etc. are being evaluated.
Delhi Master Plan 2021 is poised to revamp the national capital with sweeping changes and aims to transform the city into a world-class city which provides its people with a sustainable environment. The guiding principle of the Master Plan is to use the 27,628.9 hectares of unutilised land in the city for achieving its objective of making the city slum-free, and to develop residential units equipped with essential civic amenities, within a span of 10 years. As per the latest estimates provided by the Ministry of Housing and Urban Development, the national capital will face a scarcity of about 24 lakh dwelling units for housing an estimated 23 million people by the end of 2021.
The Master Plan, which is to be re-implemented with the land development policy, intends to ease the pressure on urban planning in the city, including congestions and shortages of civic amenities, by constructing residential projects. Structured over distinct sequential stages such as social and physical infrastructure, mixed land-use regulations, development code and monitoring, the Master Plan aims to explore options for developing housing projects with amenities better suited to meet the challenges of urban planning in the national capital.
Guide for achieving slum free vision
The Master Plan will serve as a guide for all action towards its aim to provide rehabilitation in the form of built-up houses with all civic amenities to the slum dwellers of the city. With an intent to reinforce the capacity of the city to deal with the issue of unauthorised development of slums and other informal dwellings, 23 slum areas have been identified by the Delhi Development Authority (DDA) for rehabilitation of dwellers living in these areas in sub-standard conditions.
The road ahead
Once ready and implemented, the Delhi Master Plan 2021 is expected to provide holistic benefits to the city, in the form of amenities better suited to suffice the needs of its ever-burgeoning population, and an infrastructural framework that is conducive to the economic growth of the national capital. However, the success of the Master Plan 2021 in realising the vision of making Delhi a global metropolis is subject to the implementation of strategies, schemes, guidelines, policies and programmes. Further, it is imperative to enforce a monitoring process at every stage of the implementation cycle to not only evaluate and validate the enactment of the Master Plan with the established goals, but also to realign strategies to overcome its shortcomings.
Source: http://www.grantthornton.in/html/gt_insight/?p=752
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