Union Budget 2012 Impact on Real Estate in India
The much awaited budget of 2012-13 which was recently presented by the Honorable Finance Minister had no drastic changes for the Real Estate sector as compared to the previous year’s budget.
As expected, the personal income tax slab has been hiked and 1% interest subvention scheme continues for an affordable housing in India. According to an industry expert, budget 2012 has ignored or failed to address the real estate wish list. Hike in service tax will have a negative impact on real estate, as this sector enjoys services from all the service industries. Hike in service tax can also result in the increase of the construction cost. This can lead to an increase in the property price.
In this article we attempt to review the Union Budget of 2012, what the Real Estate sector expected of it, what the budget finally delivered and a comparison with the budget 2011 for real estate in India.
Expectations from Real Estate Sector in Budget 2012;
The real estate sector and the common man (as a property buyer) had a number of expectations from the Budget 2012-13. As per pre-budget expectations, industry experts and working professionals expected exemption limit of Rs. 3 lakh. The 1% tax rebate for home loans on properties costing up to Rs. 25 lakh were expected this year as well. The wish list of the realtors for the Budget 2012 expected that the government will improve the real estate sector by recognizing it as an “Industry“. Property buyers had a wish list of incentives for buyers who purchased second and third homes.
Union Budget 2011 V/s Budget 2012
According to real estate experts, Union budget 2012 is a ray of hope for the real estate industry, but a disappointing one for the middle-income property buyers in India. The realty sector had its own wish list but what matters is that of the list, how many wishes were granted in this Budget. Following are the new inputs in budget 2012 compared to the previous year’s budget.
Personal income tax slab: The personal income tax slab has been hiked from Rs. 1, 80,000 to Rs. 2 lakh. This will increase the disposable income of the common man, which can boost domestic investments.
Rebate on home loan: In the budget 2011, a 1% interest rate subsidy was provided for loans towards affordable housing. This will continue for this financial year and will boost the affordable housing segment.
Hike in service tax: Last year, real estate sector was brought under service tax, which was one of the reasons for a hike in realty prices. This year, the hike in service tax from 10 % to 12 % not only disappointed the service industry, but also the real estate industry. For the real estate in India, service tax is levied on 25 % of the gross sale value of the property. Hike in the service tax will increase the cost of construction materials which will further lead to increase in property prices.
TDS on purchase of property: To restrict the usage of black money, the government plans tax deduction at source on the transfer of immovable property (other than agricultural land). The budget also proposed a simple one-page challan for the payment of TDS to reduce the compliance burden on a buyer. This amendment will take effect from October 1, 2012.
Positives of Union Budget 2012 on real estate
Though the budget 2012 dissatisfied the service industries and property buyers, it has some positive rules for real estate in India. Following are the few positives which were welcomed by property buyers and the realty sector in India.
External commercial borrowing: Although allowing External Commercial Borrowing (ECB) for affordable housing is an excellent move, the government has also reduced the withholding tax on ECBs for affordable housing from 20% to 5% for 3 years.
1% interest rate subsidy provided last year for loans towards affordable housing continues this year too. The 1% tax rebate for home loans of up to Rs.15 lakh on homes costing up to Rs. 25 lakh will prove beneficial for developers in this segment.
No capital gains tax if the amount from the sale of a residential property is invested in equity or equipment of an SME. It provides the homeowners with more reinvestment options. Previously, the only route for exemption was the purchase of another property or tax saving bonds.
Transfer of a property will not be registered until the tax applicable is deducted and the proof of deduction and payment of TDS to the government is furnished. This helps the government to check the menace of the black money.
Marginal rising of tax slabs puts more income with the average salaried tax payer. This is positive for the real estate and domestic investments.
In the Union budget 2012, there is no industry status for the sector, nor are there any incentives under section 80 (I) B of I-T Act. The TDS on a purchase of property can lead to more compliance because of the better reporting mechanism of realty transactions. The responsibility of the deduction of tax is on the transferee (The person to whom it is being transferred) He is required to withhold the tax of 1 % of the sale amount. In case the person fails to pay the TDS, he is treated as an ‘assesse in default’. He will also be liable to pay a penalty.
Overall the budget 2012-13 is a discontent for the real estate and service industries. Service Tax is hiked from 10 % to 12 %. The increase in excise duty also may percolate through an increase in raw materials for housing and increase in other prices.
