An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Union Budget 2011-12: Impact on Real Estate Sector

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

An overview
While India continues to be one of the fastest growing economies, this pace of growth is unlikely to sustain unless it is supported by an equally robust development of its infrastructure. Key requirements in order to achieve a GDP growth rate exceeding 8-9% include roads, power, ports as well as urban i f ll b infrastructure. Given the rapid pace at which this sector needs to be developed, investment has been encouraged both by way of long term debt funding and equity participation including participation, FDI with minimal or no restrictions. Various operating models have also been implemented, such as Public Private Partnerships (PPP), Build Own Operate Transfer (BOOT) and Build Own Lease Transfer (BOLT). ( ) The progress report of October 2010 indicates that projects such as roads, power, railways, petroleum, telecom, coal, and steel constitute about 92 per cent of the total 559 monitored projects. While overall investment in infrastructure seems on target, investment requirements in key areas is lagging. Development of infrastructure continues to face significant challenges, whether in terms of land acquisition for projects or due to lack of monitoring resulting in time and cost overruns. This has been emphasised by the Finance Minister by his statement that implementation gaps, leakages from public programmes and the fi l quality pose l k f bli d h final li a serious challenge. The last couple of budgets have taken steps in the right direction for growth of the sector. An allocation of ` sector 20,000 crore towards infrastructure projects under the 2011 budget is an attempt to achieve the Governments target for growth of Infrastructure under the Eleventh Plan. However, it is absolutely essential to continue to provide the necessary thrust through policy measures to encourage a sector which is an essential prerequisite for the development of the entire economy.

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Key K expectations i
Infrastructure sector

Promotion of PPP projects so as to provide impetus to accelerated infrastructure development and also provide requisite finance for mega infrastructure projects Development of rural infrastructure Extension of deadline of 31st March 2012 for notifying Special Economic Zones (SEZ) Single i d Si l window clearance for SEZ approvals l f S Z l Reintroduction of tax exemption under section 10(23G) to companies investing in infrastructure projects on interest income g p gains earned on investments and long term capital g Extension of exemption under section 80IA by another year Reduced interest rates on loans availed for infrastructure projects Limit available for deduction under section 80CCF for subscription to infrastructure bonds to be increased and the period of deduction extended by one more year

Service tax exemption for roads and airport projects should be extended to other infrastructure projects, specially in the power, water supply, water treatment, sewerage, mining and gas distribution

Real R l estate sector t t t

Re-introduction of tax holiday for affordable housing projects An upward revision of the present limit of Rs. 1 Lac for tax deduction of interest on loan for self occupied house Deduction principal repayment of home loans should not be clubbed with other deductions under section 80C External commercial borrowing (ECB), presently available only for integrated township should be made available to select real estate activities with appropriate safeguards Increasing tax breaks provided to housing finance companies

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Key policy initiatives

`214,000 crore allocated to the infrastructure sector - an y p increase by 23.3% over the previous allocation Allocation to infrastructure sector amounts to 48.5% of Gross Budgetary Expenditure An increased allocation of `2,000 crore provided to the Rural Infrastructural Development Fund which is to be used only for creating of warehousing facilities Approval given to setup 15 more Mega F d Parks A l i M Food P k Allocation for providing Rural Broadband Connectivity to 250,000 Gram Panchayats Increased allocation of `10,000 crore in Bharat Nirman Yojna p y p g g p j Speedy implementation of ongoing Metro projects at Bengaluru, Kolkata and Chennai and taking up Delhi Metro Phase III and Mumbai Metro Line III Allocation of `3,000 crore to Rural Housing Fund Subsidies to kerosene / LPG / fertilizers to be directly transferred to people Below Poverty Line in a phased manner - system to in place by March 2012 Investment in cold chains, post harvest storage and capital investment in fertilizer production will be categorised as infrastructure sub sector National Capacity B ildi Programme launched to N i lC i Building P l h d enhance capacities of public functionaries in identifying, conceptualising, structuring and managing PPPs A comprehensive PPP policy to be announced

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Key policy initiatives

In order to increase flow of funds to infrastructure sector, Foreign Institutional Investor (FII) limit for investment in corporate bonds having a residual maturity of over five years has been increased by US$20 billion, taking the overall limit to US$40 billion Since infrastructure companies are usually structured as Special Purpose Vehicles (SPVs), FIIs also permitted to invest in unlisted bonds with a minimum lock in period of 3 years, years with trading of such bonds restricted amongst FIIs In order to attract investment in enhancing storage capacity and cold chains, capital investment in this sector to be eligible for Viability Gap Funding scheme of the Finance g y p g Ministry Notified Infrastructure Debt Funds to be created to attract foreign funds in infrastructure financing Additional outlay of `5,000 crore proposed to be sanctioned in 2011-12 to Infrastructure Finance Company Limited for providing long term finance to infrastructure projects A total of `30,000 crore tax free bonds to be issued to , boost infrastructure development in railways (IRFC `10,000 crore), ports (`5,000 crore), housing (HUDCO `5,000 crore) and highway development (NHAI `10,000 crore) Existing scheme of interest subvention of 1 per cent on housing loan further liberalised to include houses the cost of which does not exceed `25 Lakh (from the present limit of `10 Lakh) and existing housing loan limit enhanced to `25 Lakh for dwelling units under priority sector lending on account of the steep rise in real estate prices To enhance credit worthiness of economically weaker sections and LIG households a Mortgage Risk Guarantee households, Fund to be created under Rajiv Awas Yojana

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Direct tax proposals Di l

Infrastructure Debt Funds p p - Section 10 proposed to be amended to enable notification of Infrastructure Debt Fund set up in accordance with prescribed guidelines - Once notified, income of such debt funds would be exempt from tax - Interest income earned by non residents from such fund is taxable at 5% on gross basis (in case of foreign companies effective tax rate will be increased by the applicable surcharge rate of 2%) - I f Infrastructure Debt f d to ensure withholding of tax D b fund i hh ldi f at the prescribed rate of 5% (in case payee is a foreign company, tax should be withheld including a surcharge of 2%) - Amendments to be effective from 1 June 2011 It is proposed to extend deduction of `20,000 under section 80CCF for investment in long term infrastructure bonds for AY 2012-13 SEZ developers liable to MAT from AY 2012-13 and Dividend Distribution Tax (DDT) on dividends distributed after 1 June 2011 Terminal time limit prescribed for eligible power projects to avail deduction under section 80 IA (4)(iv) extended to upto 31 ( )( ) p March 2012 From the Assessment Year 2012-13, deduction under section 80 IB (9) will not be available for blocks licensed under a contract awarded after 31 March 2011 under the New Exploration Licensing Policy Capital expenditure (other than on land, goodwill and financial instrument) fully deductible in case of "specified businesses". i ) f ll d d ibl i f" ifi d b i " Definition of specified business extended to include developing and building housing project scheme for notified affordable housing project and production of fertiliser in India having a date of commencement on or after 1 April 2011

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Indirect tax proposals

The implications of indirect taxes on development of p p infrastructure have always been complex. This is compounded by the fact that involvement of both State authorities and Central Governments is inevitable since there is a levy of tax on goods and services. One of the key contentions has been the apportionment in the value of goods and services. The real estate industry has also been vexed with the issue on applicability of service tax on renting of immoveable li bili f i i fi bl property services since July 2007. Recently the Hon'ble Supreme Court has stayed the judgment of the Delhi High Court thus allowing the tax authorities to recover service tax on such services. Further whether sale of constructed flats/ services apartments would attract service tax continues to be an issue without any clear answer. The introduction of GST is likely to resolve these issues to y a large extent. The following changes have been proposed in the current budget:
Customs

Duty exemption for water pumping station and water reservoir of water supply projects for agricultural and industrial use Duty exemption currently available to "Tunnel Boring Machine" and parts thereof for hydro-electric power projects is being extended to similar machines for use in highway development projects as well Exemption is granted to specified machinery (Bio-based asphalt) for construction of National highways Concessional duty on parts and components for manufacture of specified high voltage transmission equipments

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Indirect tax proposals

Service tax

Central excise

Exemption is proposed for Works contract services which are provided: In construction or finishing of new residential complex under Jawaharlal Nehru National Urban Renewal Mission & Rajiv Awaas Yojana Wholly within an airport, port or other port for specified purposes Goods or services used for construction excepting when they are used for provision of specified construction services would not be eligible to CENVAT credit Taxable services used and consumed within an SEZ by a SEZ Unit/ Developer are exempt from payment of Service tax. Proportionate refund will be provided for other services availed Refund mechanism to SEZ exporters to be simplified and expedited by the authorities

In line with exemption from CVD on the import of goods for expansion of existing mega/ultra mega power projects, excise duty exemption is being extended to goods required under specified conditions for such projects Clearances from SEZ to DTA exempted from Special e empted Additional Duty provided VAT/ Sales tax is charged on such clearances The rate structure applicable to portland cement has been revised. The rate of duty for cement manufactured by units other than mini-cement plants and cleared in a packaged form has been converted to a combination of ad valerom and specific rates along with reduction in rates. Similar changes are proposed for cement manufactured by mini cement plants. Rate of duty on clinker revised from Rs.375 PMT to 10% plus 200 PMT Goods or services used for construction of factory would not be available as CENVAT credit CENVAT credit of service tax paid on the full value of a works contact would be restricted to 40%

Grant Thornton India. All rights reserved.

An Overview

Key Expectations

Key policy initiatives

Direct Tax Proposals

Indirect Tax Proposals

Our Offices

Our offices
To know more about Grant Thornton, please visit www.wcgt.in or contact any of our offices listed below:
NEW DELHI National Office Outer Circle L 41 Connaught Circus New Delhi 110 001 T +91 11 4278 7070 GURGAON 21st Floor, DLF Square Jacaranda Marg DLF Phase II Gurgaon 122 002 T +91 124 462 8000 BENGALURU Wings, First Floor 16/1 Cambridge Road Halasuru Bangalore 560 008 T +91 80 4243 0700 HYDERABAD Uptown Banjara Road No 3 j Banjara Hills Hyderabad 500 034 T +91 40 6630 8230 CHANDIGARH SCO 17 2nd Floor Sector 17 E Chandigarh 160 017 T +91 172 4338 000 MUMBAI Engineering Centre, 6th Floor 9 Matthew Road Opera House p Mumbai 400 004 T +91 22 2367 1623 CHENNAI Arihant Nitco Park, 6th floor No.90, Dr. Radhakrishnan Salai Mylapore Chennai 600 004 T +91 44 4294 0000 PUNE 401 Century Arcade Narangi Baug Road Off Boat Club Road Pune 411 001 T +91 20 4105 7000

About Grant Thornton International Grant Thornton International is one of the worlds leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist advisory services to privately held businesses and public interest entities. Clients of member and correspondent firms can access the knowledge and experience of more than 2400 partners in over 80 countries and consistently receive a distinctive, high quality and personalized service wherever they choose to do business. Grant Thornton International strives to speak out on issues that matter to business and which are in the wider public interest and to be a bold and positive leader in its chosen markets and within the global accounting profession profession. About Grant Thornton India Grant Thornton India is a member firm within Grant Thornton International. The Firm in India was established in 1935 & it is one of the oldest and most reputed accountancy firms in India. Grant Thornton India is also the leading firm in India advising business owners and entrepreneurs with international ambitions.