CREDAI Pre-budget Recommendation 2011-12

1. CREDAI Pre-budget Recommendation 2011-12

2. Contents Part I - Recommendations on Procedural aspects Part II - Recommendations on Revenue impacting aspects Part III - Other Recommendations

3. Part I - Recommendations on Procedural Aspects Direct Tax Tax holidays to Industrial Parks - Section 80IA (4)(iii) Conversion of Company into a Limited Liability Partnership Other Recommendations Indirect Tax Customs Service Tax Cenvat Credit CST

4. Direct Tax Recommendations CREDAI © 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

5. New Industrial Park Scheme, 2008 was notified by the Central Government on 8 January 2008, for parks that began to develop, develop and operate or maintain and operate between the period of 1 April 2006 to 31 March 2009. (During the interim period, there was no notification as the IPS 2002 came to an end on 31 March 2006 and the IPS 2008 was only notified on January 8 2008). Benefit to any undertaking which develops, develops and operates or maintains and operates an Industrial park which is notified upto 31 March 2011 Further, under automatic route of approval of Industrial Park, minimum number of Industrial Units is 30 Increased activities in IT Sector Companies in service sector need to be given incentives in view of the employment generation ability of this sector As rental costs form part a significant expenditure of IT/ BPO business - Urgent need to give incentives in view of competition from global peers Tax holidays to Industrial Parks - Section 80-IA (4)(iii) Issue Impact Recommendation • Extension in time limit for notification upto 31 March 2015 • All Pending Applications applied under the original Industrial Parks Scheme of 2002 should be cleared both under the Automatic and Non Automatic Route • The then Finance Minister during the Budget presentation in Feb 2006 announced the extension of the Industrial Park Scheme of 2002 by 3 more years. Accordingly the Finance Act was appropriately changed to accommodate the date as 31.03.2009 against 31.03.2006 for claiming 80IA benefits. The Industrial Park Scheme modification was issued by the CBDT only in Jan 2008.

6. Benefits available only on completion of projects Applications were made in the intervening period April 2006 till the introduction of Industrial Park Scheme 2008 are pending approval Tax holidays to Industrial Parks - Section 80-IA (4)(iii) Issue Impact Recommendation • During the interregnum period of 01/04/2006 to 08/01/2008 DIPP (Department of Industrial Promotion & Policy), Ministry of Commerce which was administering the Industrial Park Scheme 2002 received applications under the extended Industrial Park scheme of 2002. The applicants were inspected by the Directorate of Industries and the matter was kept under active consideration. The 80IA approval was not issued as the fresh Notifications was not issued. Applications received under the Non Automatic Route should be disposed off within 6 weeks and incase of any rejection the applicant should be called & given the opportunity of hearing.

7. Tax holidays to Industrial Parks - Section 80-IA (4)(iii) Issue Impact Recommendation • One of the criteria of qualifications to claim the benefit is that the number of units in the Industrial park should not be less than 30. Since large areas are occupied by the individual industrial companies, there should not be any restriction on the number of units. • Procedures with Commerce Ministry and Central Board of Direct Taxes be completed simultaneously • Benefit u/s 80IA be allowed on part completion of project

8. Conversion of Company into a Limited Liability Partnership Issue Impact Recommendation • Threshold limit of rupees sixty lakhs as prescribed in sub-clause (e) of clause (xiiib) of section 47 of the Act • Purpose of claiming capital gains tax exemption upon conversion of a Company to an LLP, ambiguity exists regarding the meaning of the terms ‘total sales’, ‘turnover’ and ‘gross receipts’ of ‘business’ • Companies awaiting to convert into LLP which is an alternate corporate form of business have to fulfill conditions under the provisions of Act • Use of LLP as a form of business is facing several regulatory hurdles also • Real estate companies severely impacted as income from other sources includes interest, dividend etc forms substantial part of the total income • Need to rationalise the LLP regulation with the existing laws on amalgamation, demerger, conversion of partnership firm into company • Limit of rupees sixty lakhs should be enhanced to a limit of rupees one crore • For the purpose of determining the threshold of rupees sixty lakh rupees, only gross receipts from business carried on by the Company should be considered.

9. TDS on rental income Tax at source from rental income is deducted @ 15% in the case of individual and HUFs and 20% in other cases out of the gross rental income Deduction for Irrecoverable Rent Sec 36(1)(vii) - Allows deduction of amount not exceeding twenty percent of the profits derived from the business of providing long term finance (computed before making any deduction under this clause) for residential houses and carried to Special Reserve. The tax deduction at source as above is exorbitantly high because of the reasons that out of the gross rental receipts followings outgoings are deducted resulting in the excess payment of tax in many cases which is claimed as refund from the Department In computing the house property income, certain important deductions are not allowable. Such deductions in no way can be said to have been included in statutory deductions of 30% for repairs etc Other Recommendations Issue Impact Recommendation • Deduction @ 15% in case of individual and HUFs and @ 20% in other cases out of gross rental income is very high and should be reduced to 7.5% in case of individuals and HUFs and 10% in other cases. • Deduction for irrecoverable rent accounted for in earlier years should be made u/s 24 of I.T. Act • It is suggested that deduction of 40% of profit derived from business of providing long term housing finance, as applicable before 2007 budget, should be reintroduced. This will improve the thin margins of HFCs and increase their lendable resources

10. Indirect Tax Recommendations CREDAI © 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

11. The erstwhile procedure of Customs provided for endorsement of Bill of Entry in favour of the manufacturer for availment of CENVAT Credit. This procedure was dispensed with vide Customs Public Notice No. 16/2006 dated 22.3.2006. Withdrawal of procedure of endorsement of Bill of Entry in favour of the manufacturer for availment of CENVAT Credit is causing hardships to the contractor since they are unable to avail CENVAT Credit on the imported material received by them from the developer Procedure of Customs endorsement of Bill of Entry for availment of Cenvat credit by end user Issue Impact Recommendation • It is recommended that the procedure of Customs endorsement of the Bill of Entry EDI copy for availment of CENVAT Credit by the end user, be restored at the earliest by issue of a suitable Customs Trade Notice / Public Notice. • Alternatively, a provision should be made in the Bill of Entry format for indicating the details of the consignee (end user receiver) of the goods in addition to the details of the Importer as is being done in the case of Excise invoices which provides for name of the buyer as well as the consignee

12. Non-availability of credit of Service tax on construction activity against output Service tax liability for renting of immovable property In terms of a Circular No. 96/7/2007-ST, dated 23 August 2007 (as amended by Circular No. 98/1/2008-ST, dated 4 January 2008), Credit of Service tax paid on construction activities is not available as the output in such case is an immovable property which is neither ‘service’ nor ‘goods’ and hence becomes cost Credit of Service tax on construction activity against output renting of immovable property Issue Impact Recommendation • In order to reduce costs, it should be clarified that credit of Service tax paid on construction services would be admissible against output Service tax liability of the developer

13. Service tax under Joint Development Agreements Under ‘Joint Development Agreements’ (‘JDA’), developers construct buildings on land provided by the land owner. Some portion of the built-up space is transferred by the developers to land owners without any monetary consideration. Currently, Service tax is being levied on built-up portion given by developers to land owners Levy of Service tax under JDA, on built-up portion provided by developer to land owner results in increase in construction cost Issue Impact Recommendation • Under a JDA, no service is provided by developer to the land owner. It is a mutual exercise of development of land. There is no service provider- service recipient relationship between the developer and land owner • Further, there is no monetary consideration under the JDA • Accordingly, it is recommended that no Service tax should be applicable under a JDA 13

14. Services provided by a sub-contractor to main contractor in SEZ Currently exemption for Service tax is not available to sub-contractor when service provided to the main contractor in SEZ Presently, exemption from Service tax is available only to the services directly provided to the Unit or Developer within the SEZ. Normally the contractor sub-contracts the entire or part of the work to sub-contractors. The services provided by sub-contractors to SEZ unit or developer are not eligible for exemption from Service tax, thus resulting in increased project costs Issue Impact Recommendation • All services provided and consumed in the SEZ area to a unit or developer, whether provided by the main contractor or sub-contractor, should be exempted from levy of Service tax 14

15. Advances are usually issued by the developer/ contractors. Service tax liability becomes due immediately on receipt of such advances Credit is available to the contractor only after adjustment of the advances against services provided by the sub-contractor which barricades the free flow of cash Further, as per definition of ‘input services’, credit is available only in respect of input services used in provision of taxable services. Accordingly, at the time of payment of advances, input services may not have been used in provision of taxable services Cenvat credit on advance payments Issue Impact Recommendation • It may be clarified that the Service tax paid on advance payment should also be allowed immediately as CENVAT credit

16. At present CENVAT credit of capital goods is allowed only to the extent of 50% in the first Financial Year of the receipt of the capital goods and the balance 50% is permitted to be taken in the next Financial Year Non-availability of full credit in first year leads to blockage of funds and hence impacts the working capital Full credit of capital goods in the first year itself Issue Impact Recommendation • Credit Rules should be suitably amended for availment of entire duty paid on the capital goods in the first Financial Year itself

17. Part II - Revenue Impacting Recommendations Direct Tax Tax deduction to first time home buyers Tax Holiday for housing projects - Section 80-IB(10) Deduction for principal repayment of a housing loan - Section 80C Capital Gains Rental Income Expenditure in relation to income not includible in total income Wealth Tax

18. Part II - Revenue Impacting Recommendations Indirect Tax GST Service Tax Excise Duty Cenvat Credit CST

19. Direct Tax Recommendations CREDAI © 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

20. Tax deduction to first time home buyers Issue Impact Recommendation • Benefits available under first time home buyers tax credit (‘FTHTC’) scheme in US may be replicated in India in the form of tax breaks from personal taxes • For qualified homes purchased from 2011 onwards for first time home buyer, the maximum deduction equals the lesser of: • 10% of the purchase price of the house; or • Deduction of the cost of house purchased: • INR 50 lakhs for Mumbai • INR 30 lakhs for Delhi, Bangalore, Chennai, Hyderabad and Kolkata • INR 20 lakhs for other cities • Spread over a period of 10 years for purchase of one house • The total deduction remains capped at INR 5 lakhs for a given year • Benefits on affordable housing only under Section 80IB(10) of the Income tax Act, 1961 • The predominant objective of section 80IB (10) is to promote housing projects by way of giving tax benefits to the developers of low and middle class segments to be further passed on to the end consumers – this has not been too successful with many restrictions • No other benefit available to individual tax payers apart from principal repayment under Section 80C of the Act and interest on loan • Real estate prices in India have sky rocketed over the last one year ie post recession, it becomes all the more important to give certain tax benefits to the Individual tax payer • Incentives to low income group and middle income group to help them in acquiring houses for themselves • Imperative to give benefits to the Indian consumers directly as a tax break from their personal taxes to encourage and promote housing for the low and middle class segment

21. Tax Holiday for housing projects - Section 80IB(10) Issue Impact Recommendation • Cut-off date for eligibility • Allotment of multiple units barred • Increase of the period allowed for completion of housing project from existing 4 years to 5 years for projects approved on or after April 1, 2005 as per Finance Act, 2010 • Applicability of additional conditions retrospectively • Need to promote affordable housing projects • Need for a tax holiday to make affordable housing a more realistic proposition • Entire project to loose the benefit if conditions not complied with • Members of Indian families prefer to stay close-knit, even geographically - Benefit lost if spouse / minor child allotted house in the same apartment as the husband / father • Cut-off date for eligibility, to be further extended • Tax holiday eligibility, based on project completion condition, be restored. • Increase the period allowed from 5 years to 1 more year • Sale to Companies / Organization and spouse / minor children be exempted from the restriction on allotment of multiple units • Tax holiday pertaining to units, for which prescribed conditions not complied with, should be lost

22. Present limit for deduction under section 80C is INR 100,000 Increasing the threshold limit for the deduction would provide relief to the middle class Increase disposable income in their hands Deduction for principal repayment of a housing loan - Section 80C Issue Impact Recommendation • In addition to the present deduction upto INR 100,000, a separate limit up to INR 200,000 deduction be permitted for repayment of principal portion of housing loan for self occupied residential property

23. 36 months holding period for qualification as a long term capital asset Tax @ 20 percent on long term capital gains on transfer of house property Base year for indexation Capital gain arising from transfer of any capital asset is exempt under section 54 from tax in cases where the sale proceeds are invested in acquiring one residential house Encourage investment in real estate and to provide liquidity to investors Rate of 20 percent introduced when the maximum marginal rate was 50 percent Long time since the base year for indexation not updated Restriction on the exemption of acquisition of one residential house is a deterrent to the object of boosting the housing Capital gains Issue Impact Recommendation • Reduce the holding period for qualification as a long term capital asset to 12 months • Reduce the tax rate on long term capital gains on transfer of house property to 10 percent • Base year for indexation be changed every 10/15 years • Scope of the provision of section 54 should be broadened by allowing the exemption as long as the entire capital gain is invested, whether in one or more houses

24. Incentives to promote rental housing In view of the housing shortage in the country and the objective ‘Shelter for All’ and in view of the fact that not all can afford ownership housing, we need to give a big boost to ‘Rental Housing’ Rental income Issue Impact Recommendation • Income from renting of properties be taxed at a flat rate of 10% • Provision of rental housing on a large scale will require the services of Property Management Firms may be brought within the ambit of Section 80 IB (10) and Section 10 (23G) • It is recommended that the deduction from rental income under Section 24(a) be increased from 30% to 50%. This will promote rental housing. For women and Senior Citizen, the deduction could be 100%, keeping social requirements and empowerment of women in view

25. Section 14A provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee (i.e. exempt income). The method prescribed in rule 8D states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts : The amount of expenditure directly relating to income which does not form part of total income. In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with the prescribed formula An amount equal to ½ % of the average of the value of investment. In case of a real estate company, multiple projects are carried out through SPVs which are held by a Investment company In the case of real estate companies, incomes are derived from 3 sources i.e. by way of business income which is the core business of the company; income from house property and investment in shares and mutual funds. The expenses incurred by real estate companies are mostly in relation to development of property and only nominal expenses are incurred for income from house property and incomes from investment in shares, mutual funds, etc. As such to disallow actual expenses incurred for development of housing projects needs to be re-looked . Section 14A of the Act & Rule 8D of Income Tax Rules, 1962 - Expenditure in relation to income not includible in total income Issue Impact Recommendation • It is recommended that no disallowance of expenditure should be made in the case of real estate companies • If at all disallowance has to be made, then there should be a cap of a maximum of 5% of the total expenditure of the company

26. In the above example of a closely held Investment company it is common knowledge that the administrative expenses are nominal as compared to the value of the investments. In such cases, the amount to be disallowed under the formula will far exceed the total expenses In formula prescribed under Rule 8D, there is a reference to the average value of investments and total assets as per the Balance Sheet of the assessee. It is not clear as to what figures shall be adopted in the cases of non-corporate assessees, such as Individuals and HUFs who do no maintain books of accounts Section 14A of the Act & Rule 8D of Income Tax Rules, 1962 - Expenditure in relation to income not includible in total income Issue Impact Recommendation • In the case of dividend income, the scheme of the Income-tax Act is to collect tax at 15% plus applicable surcharge. Similarly, the firm is required to pay tax at 30% plus applicable surcharge. For this reason, the balance of profit apportioned to partners is exempted in the hands of the partners. Similar exemption is given u/s.10(38) in respect of long term capital gains on which STT is paid. This exemption is granted not as an incentive but because the tax is levied at source. It is, therefore, suggested that the section should be suitably amended it should be clarified that Section 14A should not be invoked where income is received by the assessee after payment of tax under the Income-tax Act

27. Urban land held as stock in trade by developer is taxable Adversely impacts real estate developers as land is held by them as stock in trade Wealth Tax - Urban land held as stock in Trade [Section 2 (ea)] Issue Impact Recommendation • Most of the assets are exempt from levy of wealth tax except for a few items like jewellery and bullion, motor cars, boats, yachts, which were excluded so long as they were held as stock in trade • Similar exemption should be granted to urban land held as stock in trade

28. Indirect Tax Recommendations CREDAI © 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

29. Official documents released till date on GST do not divulge any details about levy/ non levy of GST on real estate transactions GST Recommendations Issue Recommendation • In case GST is implemented during next fiscal year, it is recommended that: • Sale/ transfer/ leasing of real estate properties should not be subjected to GST as Stamp duty is already being levied on GST. This should be irrespective of the time of entering into the agreement. For example, the exemption should also apply in cases where the builder/ developer enters into a contract with potential buyers, prior to completion of construction • Concessional/ lower rate of GST should be provided for all essential inputs, capital goods and input services used in the real estate sector, to achieve revenue neutrality • Government should provide for zero rating for special categories of real estate transactions such as for economic weaker sections of society, Government property; etc i.e. refund of all input GST should be available • CST should be completely phased out • All local levies/ cess on construction activities such as Entry tax, Labour cess, Municipal levies etc. should be subsumed into GST • Where, GST is levied on real estate transactions, Stamp duty should be subsumed into GST

30. With effect from July 2010, scope of service under taxable category of ‘Construction For Residential Complexes Services’ and ‘Commercial or Industrial Construction Services’ was expanded to include services provided for construction of a residential complex/ commercial construction As a matter of practice and in order to fund the construction costs, most of the agreements are entered with the buyers at the time of initiation of a project with milestone linked installments Service tax - Real estate Background Impact Recommendation • Service Tax should not be levied on apartments & houses under construction as the transaction between Property Developers and the Purchaser, is for selling of immovable property including land component. • It is pertinent to note that the aforesaid transaction suffers Stamp Duty payable to respective State Government as ‘ land’ is covered under the State’s subject in the Indian Constitution. • Some States in India permit registration of property (land and construction component separately ) during construction stage as well as post completion of construction.

31. The above provision is applicable where such property is intended for sale, before, during or after construction (except where no sum is received from prospective buyer by the builder before the grant of completion certificate) All these transactions would now become liable to Service tax [in addition to stamp duty] thereby resulting in additional burden on the purchaser Alternatively, the same would severely impact the cash flow of the developers Service tax - Real estate Background Impact Recommendation • In such States, VAT is being demanded on the construction component only by the State Govt. • Accordingly, simply because certain States follow the above procedure it is unfair on the part of the Central Govt. to levy Service Tax by treating the Developers as Contractors.

32. Service tax - Real estate Background Impact Recommendation • Hence levying Service Tax on Residential Apartments and Houses during Construction state is unfair. • Hence to mitigate the hardship to the end consumer who is over burdened with double taxation a relook on this aspect goes a long way.

33. Service tax - Real estate Background Impact Recommendation • It is recommended that appropriate amendment should be made to eliminate the additional burden on real estate transactions • Not withstanding the above, if the Govt wishes to continue this levy, the following should be exempted: • If the total Flat is registered irrespective of stage of construction of dwelling unit, Govt can treat sale deed as completion/ occupancy certificate. • If semi finished flat is registered, to that extent service tax should not be charged. • At least a minimum threshold should be defined so as to keep low value transaction(s) out of the ambit of the service tax net

34. Vide Notification No. 9/2009-ST, dated 3 March 2009, exemption has been provided to services received in SEZ. As per the notification, if the said ‘services are consumed within the SEZ ’ the same are exempt from Service tax. However, in case the services are not wholly consumed within the SEZ, refund for the same is provided The meaning of the phrase ‘Services consumed in SEZ’, is not clear Due to lack of clarity on the meaning of phrase ‘services are consumed within the SEZ , and the fact that services are intangible in nature,it is difficult to establish whether the services are ‘consumed within the SEZ’. Hence, the same results in denial of benefit of the exemption Service rendered to SEZ Issue Impact Recommendation • It should be clarified with examples, as what will constitute as consumption of services within the SEZ. Further, it is recommended that the Notification should be withdrawn for restoration of exemption as per SEZ Act. • Further, suitable clarification should be issued on availability of exemption to taxable services used in relation to authorized operations carried outside the SEZ

35. Pursuant to the stimulus package issued by the Government, Excise duty rates were decreased from 10.3% to 8.24% w.e.f 24 February 2009). However, on withdrawal of the said stimulus package, the Excise duty rate was increased back to 10.3% w.e.f 27 February 2010 With reduction in the rate of Excise on construction material (such as cement, steel, etc.), the cost of construction came down leading to reduction in cost of housing However, withdrawal of stimulus package (i.e. increase in Excise duty rates) has resulted in increased the cost of construction thereby adversely impacting the sector Excise Duty Rates Issue Impact Recommendation • It is recommended that Excise duty rates (specially on inputs used in construction) should not be increased any further as the same would result in increased construction costs, thus making housing and commercial space unaffordable

36. Under Works Contract (Composition Scheme for Payment of Service Tax) Rules* , in terms of Rule 3(2) “ The provider of taxable service shall not take Cenvat Credit of duties or cess paid on inputs, used in or in relation to the said works contract, under the provisions of Cenvat Credit Rules 2004” Accordingly, provider of taxable services opting to pay Service tax under the composition scheme is allowed to avail credit of duty paid on capital goods and Service tax paid on input services, but is not entitled to take Cenvat credit of duty paid on inputs. For e.g. a contractor would not be entitled to avail credit of duty paid on cement to be used in execution of contract Non-availability of credit of inputs leads to cascading of tax and hence results in increase in the project cost Credit of inputs in case of composition scheme followed by the works contractor Issue Impact Recommendation • Law should be amended appropriately to allow CENVAT credit in respect of inputs to works contractors under composition scheme in line with input services and capital goods * Notification No. 32/ 2007-ST, Dated 22 May 2007 as amended by Notification No. 23/ 2009 – ST, dated 7 July 2009

37. Under Rule 6(5) of the Credit Rules, full credit of tax is allowed towards service tax paid on taxable service as specified in various sub clauses, provided not exclusively used in or in relation to manufacture of exempted goods or services. Even though presently there more than 100 services, the list of specified services is not expanded to include other services like Advertisement, Airport services, Business Auxiliary services, Business Support Services and Works Contract Service, etc. Non inclusion of certain key services like Business Auxiliary services, Business Support Services etc. leads to denial of credit and hence additional tax costs List of common services on which full credit should be available Issue Impact Recommendation • It is suggested that services which by their basic character are common in nature and cannot be identified to a specific product / output services (such as telecom, advertising agency, manpower recruitment and supply services, etc) should be added to the list • Further, since Commercial or Industrial Construction Services and Construction of Complex Services are covered within the scope of Rule 6(5) services, suitable amendment should be made to cover Works Contract Services within the scope of Rule 6(5) services

38. Cement and Bricks are not included in the existing list of ‘Declared goods’ Currently, steel being an essential input for construction is included in the list of ‘Declared goods’ prescribed under Section 14 of the Central Sales Tax Act, 1956. However, cement and brick is ignored, which is equally important as steel. Non inclusion of the same in the declared goods, make the housing exorbitant. Cement and Bricks should be included in the existing list of ‘Declared goods’ Issue Impact Recommendation • In order to make affordable housing a reality, it is recommended that cement and bricks should be included in the list of ‘Declared goods’ • For e.g. current VAT rate of cement is generally 12.5% or more. In case cement is included in the list of ‘Declared goods’, VAT would be levied at the rate of 4%.

39. Concessional benefit under the Central Sales Tax Act, 1956 is not available to Construction activities Section 8(3) does not specifically prescribe construction activities as one of the specified activities for availing benefit of Form C, hence, construction become exorbitant. Form ‘C’ for Construction Activities Issue Impact Recommendation • Section 8(3) may be suitable amended to include construction activities for the purpose of issuance of Form C • For e.g. in case value of cement to be purchased by developer is INR 100, the rate of tax on inter-State procurement of goods (to be collected in dispatching State) would be as under: • Against Form C - INR 2 (@ 2%) – [if permissible] • Without Form C – INR 12.5 or more [depending upon the VAT rate as applicable on cement in the dispatching State which is generally 12.5% or more]

40. Currently, exemption from payment of CST is available on inter-state supplies to SEZ subject to issuance of Form I by a SEZ unit or developer. However, certain components/ sub assemblies are not manufactured by the main contractor but bought from specialized agencies and directly taken to the site. However, there is no provision for issuance of Form I by the main contractor such that sub-contractors can also claim such CST exemption Absence of provision for issuance of Form I by the main contractor so that sub-contractors can also claim CST exemption, results in additional tax costs SEZ exemption from payment of CST on supplies by sub-contractor to the main contractor Issue Impact Recommendation • Provision for issuance of Form I by the main contractor so that sub-contractors can also claim such CST exemption, should be incorporated

41. Part III - Other Recommendations Interest Subsidy for Housing the Urban Poor Building & Other Construction Workers’ Welfare Cess Act, 1996 Slum Redevelopment Projects/ Dilapidated Housing / Social Housing External Commercial Borrowings Other Issues

42. Interest Subsidy for Housing the Urban Poor Background Impact Recommendation • A separate scheme be launched whereby: • limit for loan raised to Rs 4 lakhs; for houses purchased upto Rs 5 lakhs; • any eligible purchaser identified by government can buy from any builder from the open market • NPV based subsidy (@ 5%) to be provided upfront • NHB, HUDCO and all public sector banks must liberally extend home loans to these purchasers on priority basis. Certain % of total loans of Housing Financial Institutions must be given to these purchasers on priority basis • Project Funding to these projects to be given top priority at concessional rate of interest. Loans and interest should be treated at par with Agriculture sector, RBI should not consider these loans under Real Estate exposure • Higher amount of loan at a reasonably low EMI would help in spurring demand and achieving the objective of providing affordable housing • Currently, the ISHUP Scheme provides home loan with Central Government subsidy to EWS/ LIG categories for acquisition of house/ for construction of house, subject to specified conditions • The scheme provideas a subsidized loan for 15 - 20 years for a maximum amount of Rs.1,00,000 for an EWS individual for a house at least of 25 sq.mts • The subsidy is 5% p.a. for EWS and LIG, admissible for a maximum loan amount of Rs 1 lakh over the full period of the loan for construction or acquisition. The Net Present Value (NPV) subsidy is provided to the lenders upfront • The current limit of Rs 1 lakh is too low vis a vis price of real estate and therefore has not been very successful in generating housing demand • In addition, there are a lot of formalities involved under the ISHUP scheme and therefore it is not extremely easy

43. The Building & Other Construction Workers’ Welfare Cess Act, 1996, provides for levy and collection of a cess on the cost of construction The intention is spend this amount for schemes such as health insurance, training, crèches for construction workers. Government’s policy is to ensure that the intended benefits and advantages reach the construction workers at the earliest and in full measure Currently, the cess collected is not being put to use under any specific scheme The same could be used for providing subsidy to the construction labourers to purchase housing Building & Other Construction Workers’ Welfare Cess Act, 1996 Background Impact Recommendation • Construction workers to be granted 10% subsidy on purchase of any house upto Rs 5 lakhs • The grant would be in the year of purchase • Funding to be made out of this cess

44. Slum rehabilitation projects face liquidity crunch in terms of funding requirements from housing finance institutions/ banks Interest rate on housing loan is too high for the economically weaker class Specific concession to the developers of slum redevelopment projects under section 35AD Currently significant indirect tax exemptions are not available to developers under the slum rehabilitation projects High stamp Duty/ registration charges are a dampener for the slum rehabilitation projects Rajiv Awas Yojana (‘RAY’), intended to make the country slum free in five years period RAY scheme would provide basic amenities such as water supply, sewerage, drainage, internal and approach roads, street lighting and social infrastructure facilities in slums and low income settlements Financial and regulatory constraints have plagued the housing sector in India. Households falling under LIG and EWS category find it difficult to secure formal housing finance Presently no rules have been prescribed under section 35AD for taking the benefits of concessions Slum Redevelopment Projects/ Dilapidated Housing / Social Housing Issue Impact Recommendation • Housing Finance Institutions should be mandated to fund projects under RAY scheme • External Commercial Borrowings (‘ECB’) should be allowed for RAY scheme • Interest subsidy to individual borrowers should be given at the rate of 5% for all the redevelopment schemes • Rules under section 35AD should be prescribed so that the developers can avail the benefits • RAY scheme should get tax exemptions from VAT/ GST • RAY scheme should be exempted from stamp duty/ registration charges

45. End use restrictions doesn’t allow proceeds from ECB to be used for real estate activities Alternate sources for construction finance extremely restricted. Real Estate Mutual Fund (‘REMF’) approved by SEBI Stamp Duty Rates ECBs are alternative source of low cost borrowings Help developers to optimize cost Savings in cost could be passed on the ultimate consumers REMF in its present form is a dampener for the Real Estate industry Effort should be made to reduce the transaction cost of housing and discourage black money External Commercial Borrowings Issue Impact Recommendation • ECBs be permitted for funding construction costs of real estate projects • At least for those projects which qualify for 100% FDI as per FDI Policy should be permitted to raise ECB • REMF regulations should be brought in line with international norms in place as the same would boost supply of fund to housing and real estate sector • Stamp Duty rates should be reduced to 2-4 percent

46. Section 36 (1) (viia) - Provisions for bad and doubtful debts Sec.10 (23G) which exempted income from investments made by a financing company in enterprises wholly engaged in the business of developing/ Operating/Maintaining specified infrastructure facility (the definition of infrastructure facility includes housing projects) has been omitted by Finance Act 2006 wef 01-04-2007 The present section allows deduction to only banks equivalent to 10% of the value of the assets that too for doubtful and loss assets Other Issues Issue Impact Recommendation • It is suggested that the Provision of this section should be extended to Housing Finance Companies like banks and all the bad debts should be considered for deduction on provisions made and interest derecognized as per the Regulators’ directions. This will go a long way for the sustained growth of the Housing sector • It is suggested that Section 10 (23G) be reintroduced to help Housing Finance Companies working on thin margin

47. Thank You © 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.