The Union Budget has some positives for the realty sector. The external commercial borrowing (ECB) for low cost housing, extension of the one percent interest subvention scheme for low cost housing and service tax exemption on low cost housing up to an area of 60 square metres are good for the sector. The Budget will give a boost to affordable housing.
More options for investors
The exemption of proceeds from the sale of a residential property from capital gains tax, if invested in equity or equipment for a small/medium enterprise, provides home owners with more reinvestment options.
In the Union Budget for 2010-11, the Finance Minister Pranab Mukherjee had brought development of a real estate complex under the ambit of service tax unless the entire amount is paid after completion of construction. A ‘complex’ is defined as more than 12 residential units. Service tax is levied on 25 percent of the gross sale value of property.
The Budget allows ECB in the low cost housing segment. This was a long pending demand of developers. It gives a fillip to the sector. There is a shortage of an estimated 26.3 million housing units in the country. This move helps in creating more housing stock. The Finance Minister has also proposed a reduction in the tax held on ECB interest from 20 to five percent.
In addition , the Budget announced a slew of initiatives for the sector, including the setting up of a credit guarantee trust fund to ensure better flow of institutional credit for housing loans, enhancing provisions under Rural Housing Fund from Rs 3,000 crores to Rs 4,000 crores, extending the scheme of interest subvention of one percent on housing loans up to Rs 15 lakhs (where the cost of the house does not exceed Rs 25 lakhs) for another year and enhancing the limit of indirect finance under the priority sector lending from Rs 5 lakhs to Rs 10 lakhs.
The extension of the interest subvention scheme and increase in provisions under the Rural Housing Fund will boost demand for rural and affordable urban housing. Further, the reduction in tax held on ECB interest helps the sector in accessing cheaper funding.
TDS on transfer of property
This Budget has introduced a tax to be deducted at source applicable on purchase of property. The TDS is not applicable to agricultural land. The rate is one percent in case the sale consideration exceeds the specified threshold limit. The Budget has proposed the threshold limit of over Rs 50 lakhs in an urban area and Rs 20 lakhs elsewhere. The move aims at collection of tax at the earliest point. Further, it leads to a reporting mechanism of transactions.
As a step towards better tax compliance, the Budget has proposed that transfer of a property will not be registered before the tax applicable is deducted and proof of deduction and payment of TDS to the government is furnished. In addition, in order to reduce the compliance burden on a buyer, a simple one-page challan for payment of TDS has been proposed. This amendment will take effect from October 1. Previously, tax was required to be deducted at source by the transferee when a property was transferred by a non-resident.
This is an innovative step to collect tax at the earliest point. Further, it leads to more compliance because of the better reporting mechanism of realty transactions.
The onus of deduction of the tax is on the transferee. A transferee is required to withhold tax of one percent of the sale amount. There are penalty provisions under the Income Tax Act for not deducting TDS, or for not depositing the TDS deducted. So, one has to be careful with regard to the TDS requirements under the Income Tax Act.
In case a person fails to deduct the TDS, he is treated as ‘assessee in default’. He will be liable to pay a penalty. It will be a sum equal to the amount which he failed to deduct or deposit. Further, he is liable to pay simple interest on the amount of tax liable to be deducted.
Source: Times Property in The Times of India