A1.      INCENTIVE FOR HOUSING DEVELOPMENT         

1. Section 80-IA

Section 80-IA of the Income-tax Act provides that where the gross total Income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any of the business referred to in sub-section (4) then a deduction equal to 100% of the profits and gains derived from such business shall be allowed for ten consecutive assessment years.

Sub-section (4) covers the business of either (i) developing or (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility which fulfills all the conditions laid down in the said section.

The Explanation in the said Sub-section defines “infrastructure facility” as under:
(a)       a road including toll road, a bridge or a rail system;
(b)       a highway project including housing or other activities being an integral part of the highway project;
(c)        a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;

(d)a port, airport, inland waterway or inland port.

Some companies are engaged in undertaking large scale urban development projects including purchasing raw land and developing it for the purpose of construction of houses, multi-storied buildings, creation of infrastructure and social facilities such as laying of roads, systems for water supply, water treatment, sanitation and sewerage, solid waste treatment and also to create educational, medical and recreational facilities as an integral part of development of satellite townships, in accordance with the elaborate rules and regulations and with the specific approval from the State Governments. Such projects tend to reduce the pressure on existing cities by providing low priced alternatives and value for money to the customers.

While according the approval, the State Governments specifically direct that these infrastructure facilities shall ultimately be handed over and shall not remain with the developer.

After purchasing agricultural land, these companies provide and create most of the infrastructure facilities mentioned in the Explanation.

It is only by creating all these infrastructure facilities that the raw land gets converted into developed land, fit for construction of houses and multistoried buildings for residential and commercial purposes, thus augmenting the housing stock of the nation.

It is presumed that the activities of these companies are already covered by the definition of ‘infrastructure facility’ but the position has become debatable as such activities are not covered by a specific clause.

We, therefore, suggest that in the definition of ‘infrastructure facility’ the following clause may also be added:

(e)    “An integrated township development involving provision of residential, educational, medical, community, commercial or institutional buildings and creation of required facilities including roads, water supply, water treatment, sanitation and sewerage systems and solid waste treatment and management systems”.

This will meet the long outstanding demand of housing to be treated as infrastructure.

2. Section 80 IB (10)

The above section, as amended vide Finance Bill 2004-05, is as under –

“(10) The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of March, 2007 by a local authority shall be hundred percent of the profits derived in the previous year relevant to any assessment year from such housing project if, -

(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998 and completes such construction within four years from the end of the financial year in which the housing project is approved by the local authority.
Explanation – For the purposes for this clause –

(b) the project is on the size of a plot of land which has a minimum area of one acre:
Provided that nothing contained in this clause shall apply to a housing project carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings and such scheme is notified by the Board in this behalf;

(c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometers from the municipal limits of these cities and one thousand and five hundred square feet at any other place; and

(d) the built-up area of the shops and other commercial establishments included in the housing project does not exceed five per cent. of the aggregate built-up area of the housing project or two thousand square feet, whichever is less.”

Comments

As the Income Tax deduction to developers under this section was available for projects approved before 31st day of March 2007 and the date was not extended in finance bill 2007, the concession available under this section for projects sanctioned after 31st day of March 2007 has ceased.

Recommendation

To generate interest of developers in LIG/EWS housing, where supply is negligible and demand insurmountable, we recommend that the concessions under section 80 IB(10) be restored albeit with riders for area not exceeding 1500 sqft.

3. Section 24

Under Sec. 24 deduction on account of interest payment on housing loans is permissible to owners of rented dwelling units to the fullest extent.  In case of owner occupied houses the limit is set at Rs. 1.5 lakh.

It is suggested that the deduction on account of interest payment available under section 24 should be to the extent of full interest paid for all categories at least in respect of one house.

4. Section 54

At present, capital gain arising from transfer of any capital asset is exempt from tax in cases where the sale proceeds are invested in acquiring one residential house. Such a restriction is a deterrent to the object of boosting the housing sector, and hence needs to be removed. Thus, it is proposed that this restriction should be removed and the scope be broadened by allowing the exemption as long as the entire capital gain is invested, whether in one or more houses.

A2       INCENTIVES FOR PROMOTING RENTAL HOUSING

1. Tax on Rental Income

In view of the housing shortage in the country and the objective ‘Shelter for All by 2010’ and in view of the fact that not all can afford ownership housing, we need to give a big boost to ‘Rental Housing’. The following incentives are proposed (for companies / partnership / HUF / Individuals):-

2. 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. 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.

Due to above outgoings, the remanent taxable rental income works around 40% to 50% of the gross rental income where there is no claim of interest on borrowed funds. In cases where there is claim of interest on borrowings then it would be much less and in many cases it is negative. As such rate of tax deduction at source far exceeds the maximum income tax chargeable in such cases.

Therefore, 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. This will also reduce the workload of the income tax department in processing the refund applications.

3. Deduction for Irrecoverable Rent.

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 which was enhanced from 25% to 30% for repairs etc. Such deductions are as under: -

4. Time bound incentives for first time home buyers.

Principal cost of the house upto Rs. 15 lakh may be exempted from tax over a 5 years period. This will incentivise low income group and middle income group people and help them in acquiring houses for themselves as also give an immediate boost to the economy.

A3.      INCENTIVE FOR HOUSING FINANCE

1. Section 36 (1) (viii)

The section, as amended vide Finance Bill 2007, 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.

This provision enables HFCs to re-capitalise themselves as they have small capital base. Reduction in benefit will result in higher tax outgo and make the capital costly.

It is, therefore, suggested that deduction of 40% of profit derived from business of providing long term housing finance, as applicable before 2007 budget, should be restored. This will improve the thin margins of HFCs and increase their lendable resources.

2. Section 36 (1) (viia)

Provisions for bad and doubtful debts: The present section allows deduction to only banks equivalent to 10% of the value of the assets that too for doubtful and loss assets.

Housing Finance Companies as per the directions of NHB and banks as per the directions of RBI are required to make provision for bad debts ranging from 10% to 100% besides derecognition of interest. The bad and doubtful debts are of three categories. Sub-standard assets where the default is for three months, doubtful assets which have remained substandard for 1 years and loss assets where the asset has lost its realizable value.

There are two points. One the section is only applicable to banks and not to HFCs although both are making provisions and derecognising interest as per the directions of the Regulators. Secondly, the deduction is not applicable for sub-standard assets where bulk of the provision is made and interest derecognised.

The provision for bad debts and interest derecognition is done as per international norms of presenting the balance sheet in the most transparent manner. The disallowance of deduction and considering interest on bad debts on accrual basis for the purpose of tax does not take into account the accounting concept of a Going Concern. In case the deduction is allowed and the amount is recovered in coming years then automatically that income will be offered to tax although deduction was earlier allowed. In the long term there will be no loss to the I T Department.

It is suggested that the Provision of this section should be extended to Housing Finance Companies like for banks and all the bad debts should be considered for deduction on provisions made and interest derecognised as per the Regulators’ directions. This will go a long way for the sustained growth of the Housing sector.

3. Extension of Sec.10 (23G) to Housing Finance:

Sec.10 (23G) exempts 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.   Thus the benefit would accrue to HFCs only in case of project financing.  It is suggested that `housing finance' be recognized as an eligible activity for concession under Section 10 (23G).

4. Section 54 EC

Capital Gains bonds under Section 54 EC allowed to NHB has been withdrawn. In view of rising cost of money for housing finance and more than 65% increase in home loan interest in last two years, it is suggested that capital gain bonds under section 54EC to NHB restored and the same should be extended to HUDCO as well.

A4. FUNDS FOR HOUSING

1. Assess to Pension, Insurance and PF Funds.

Housing Finance is a long-term investment and asset liability mis-match is a major problem for housing finance companies.   Access to long-term funds from Provident, Insurance and Pension funds, will ease the situation.  Investment in HFIs should be an eligible investment for pension funds, Insurance funds and Provident Funds.

2. Assess to Bank Incremental Deposits.

In order to improve affordable housing finance for the lower and middle-income groups, it is important that housing finance be made available at cheaper rates.  For that it is important that housing finance companies get low cost funds.  It is suggested that banks may increase their allocation for housing from the present 3% to 5% of their incremental deposit.  The additional 2% incremental allocation may be earmarked strictly for canalizing it through housing finance companies registered with NHB.

3. Real Estate Mutual Fund (REMF) / Real Estate Investment Trust (REIT).

REMF approved by SEBI should be launched immediately. In addition, REITs should also be encouraged and necessary guidelines finalized at the earliest. These together will boost supply of fund to housing and real estate sector and enable equity participants reap the fruits of high yielding real estate sector.

5. External Commercial Borrowing (ECB).

ECBs in housing and real estate sector is totally prohibited and sector placed on negative list of RBI for bank debt, thus, leaving the sector mainly to private debts. This has lead to increase in cost of fund for private developers and together with increase in land cost has made properties unaffordable to average Indians. There being huge shortages in housing and real estate in India, opening of ECB in real estate sector will help reduce cost of fund and property prices.

Request
It is, therefore, requested that ECBs be allowed in all spheres of housing and real estate.

A5. SERVICE TAX ON RESIDENTIAL CONSTRUCTION TO BE TAKEN OUT OF SERVICE TAX NET.

12.5% Service Tax on residential construction included in finance bill 2006, when Govt. is providing all incentives to boost housing, is like a deterrent. This combined with rise in excise duty on cement and steel would raise the unit cost by about 4 to 5 percent, thereby, reducing the impact of tax incentives. Residential construction, therefore, should be taken out of service tax net.

A6. OTHER FISCAL AND REGULATORY ISSUES

1. Measures to down market housing finance to poorer sections of society.

Housing finance today addresses the needs of only middle class of the population.  The

Banking industry and the HFCs should work out mechanism which can address the needs of

poorer sections as well as the rural households by subsidising interest rates, pooling funds

and relaxing mortgage requirements as also through instruments such as micro financing,

community pool funding, agricultural land mortgaging, annual installments for loan

repayment, etc.

2. Graded scale of Grant/subsidy/loan for Social Housing

There should be graded scale of grant, subsidy and loan in such a way that lowest strata of poor get maximum subsidy and Economically Weaker Section and Low Income Group people get a combination of subsidy and affordable loan.

3. Sale of property to NRIs to be given status of deemed export.

Sale of property to NRI should be given the status of deemed export and 100% Income Tax exemption be available to builders on income earned by sale of property to NRI and money earned in foreign exchange.

4. Self-Occupied Property.

Owners of self-occupied property should be allowed depreciation and deduction for repair/maintenance, renovation and house tax up to Rs. 10,000/- per year.

5. Risk Weightage on Housing Loans.

Risk Weightage on housing loan, as applicable now, is 50% for loans upto Rs. 20 lac and 75% for loans above Rs. 20 lac. For loans on commercial real estate, it is 150%. It is suggested that risk weightage on housing and commercial real estate be brought down to 50% and 100% as it was, earlier.

6. Setting up of Mortgage Insurance Companies.

Setting up of Mortgage Insurance Companies under Mortgage Credit Guarantee Scheme should be speeded up to encourage secondary mortgage market.

7. Special Status to Real Estate Development.

Real Estate Development should be given special status at par to industry to enable banks to finance viable projects.

8. Bank Finance.

Presently RBI discourages Banking System from making construction finance available to the developers. It is pertinent to note that in the absence of debt from the Banking System the developers have to depend upon private sources of funding which pushes up the cost to the detriment of ultimate buyers. It is, therefore, suggested that construction finance should be made available by the Banking System to the developers with proven track record. This will enable them to complete the projects faster and hand over possession to users in time.

Banks should also provide construction advances / working capitals to developers on the lines of institutional loans to industry.

9. TDS on Interest on Deposits

The limit of TDS on interest on deposits should be raised to Rs. 10,000/- as it was few years ago.

10. Stamp Duty

In order to reduce transaction cost of housing and to discourage black money deals in housing it is important that stamp duties are reduced to 2-5 percent.  Reduction in stamp duty will generate more revenue to State Govts by increasing transactions and help in reducing cost of securitisation of housing loans.
           
A7. MISCELLANEOUS ISSUES

1. Urban Land held as stock in trade [Section 2 (ea)]

In a major change effected during April 1993, most of the assets were taken out from the levy of wealth tax except for a few items like jewellery and bullion, motor cars, boats, yachts which were excluded from such levy so long as they were held as stock in trade have been exempted from the purview of wealth tax, there is no reason for taxing urban land held by a developer as its stock in trade.

Suggestion:
Hence, we recommend that a similar exemption be granted to urban land held by an assessee as stock in trade by inclusion of the following proviso under Section 2(ea) (i) (v) after the word ‘urban land’:

Provided that where such urban land is held by an assessee as stock in trade, who is engaged in the development of vacant urban land in pursuance of permission granted by a competent authority of the state/central government, such land shall be deemed to be excluded from the assets specified in this sub clause.

Alternate Suggestion:
However, if despite the above explanation, it is still considered necessary to impose wealth tax on vacant urban land held as stock in trade of a developer, a distinction needs to be made between authorized and unauthorized developers in accordance with our suggestions given below.

A large number of projects are being developed by the private developers encompassing the entire range of “on site” urban infrastructure and development, including items such as acquisition and assemblage of land, its servicing, provision of social and community infrastructure, development of certain prescribed percentage of housing for the vulnerable sections of society, development of plots and construction of housing thereupon and subsequent administration and maintenance of the project prior to their handing over of infrastructure facilities to a civic authority of the Government.

Hence, the holding of above land for aforesaid “on site” infrastructure development has to be recognized as ‘stock-in-trade’ similar to holding of raw materials by manufacturing industry with regard to their finished products. Accordingly, developers are required to carry out all developmental activities which are enjoined upon the state as its constitutional responsibilities – provision of off-site & social infrastructure.

The present section 2(ea) of the Wealth Tax Act, 1957, however does not distinguish between areas developed by professional authorized developers who are engaged in development of urban land after obtaining necessary approvals from a competent Government authority as against “fly by night” developers who develop unauthorized projects. This objective can be achieved by application of wealth tax only to areas developed by professional authorized developers ten years from the date infrastructure facilities of such projects are taken over by appropriate government authority. However, in case of unauthorized “fly by night” developers, the levy of wealth tax, the period of ten years from the date of acquisition could be retained since such a provision would act as a financial penalty as also a deterrent to unauthorized development.

This modification would not only encourage authorized developments but also curb speculative activities of unscrupulous developers by imposing wealth tax on their unauthorized constructions.

It is, therefore, suggested that the existing Section 2(ea) of the Wealth Tax Act may be amended to read as under:

i.   In Clause (b), after sub-clause (ii), the letter and bracket (A) may be inserted after the words “but does not include land”.

ii.   The following clause may be inserted after the aforesaid Clause (A):

“(B) held by the assessee being part of a development project, undertaken with the approval of an appropriate Government authority until the expiry of a period of ten years from the date of taking over of the said infrastructure facilities of the said project by the Government, local authority or any other statutory body.”

It is suggested to include Urban Land held as stock in trade under Section 2(ea) of the Wealth Tax Act.

2. The land should be made available by the Govt. agencies in different States of India for the development of residential housing projects at concessional rate. This will help in reducing cost of housing units which has shot up 50 – 100 percent in last two years.

3. The entire set up of District Town Planning (DTP) Organisations should be re organized.

4. Re-organisation of Legal Structures of Business Enterprises.

Under Section 45 of the Income-tax Act, gain made on the transfer of Capital Asset is subjected to Capital Gains Tax. The basic intention behind this Section is that only when the owner of a capital asset realises real gain by transfer to an outsider, then the gain should be subjected to tax.

Technically, the transfer of a capital asset, which include a business undertaking as a whole, from one legal entity to another legal entity also attracts tax. Similarly, tax gets attracted even when the legal structures of business are changed. For instance, when one company amalgamates into another and the shareholders of the amalgamating company receive shares in the amalgamated company, then Capital Gains Tax is attracted, although the shareholders of the amalgamating company do not actually realise any capital gain in terms of money.

To prevent Capital Gains Tax being attracted on mere re-organisation of business structures, various provisions have been enacted.

So far as one company amalgamating into another is concerned, law was amended as early as 1967, to ensure that Capital Gains Tax is not attracted.

Recently, other types of re-organisations have also been exempted in order to ensure that Capital Gains Tax is not attracted, when the same persons continue to be the owners of business, but in a different legal form. Consequently, in 1998, clause (xiv) was inserted in Section 47 to provide that when a sole proprietary concern is converted into a company, it will not be treated as a transfer attracting Capital Gains Tax. Similarly, clause (xiii) was inserted to provide that when a partnership firm is converted into a company, then also no Capital Gains Tax will be attracted.

The insertion of the aforesaid clauses shows the clear intention of the Government that when the owners of the business continue to be the same, and no real gain is made, then notional capital gain should not be subjected to tax.

However, in the case of clause (xiv) of Section 47, it has been provided that the sole proprietor should continue to hold not less than 50% of the total voting power in the company for a period of five years. Similarly, in clause (xiii) of Section 47, it has been provided that where a partnership firm is converted into a company, the ex-partners should continue to hold not less than 50% of the total voting power in the company for a period of five years.

In many situations, the sole proprietary concerns converted into companies or partnership firms converted into companies, may involve the amalgamation of these companies into other companies.

Section 47A lays down that where various conditions mentioned in clauses (xiii) and (xiv) of Section 47 including the requirement of holding not less than 50% shares for a period of five years, is not complied with, then the exemption granted by the said clauses shall stand withdrawn, and the successor company shall be subjected to Capital Gains Tax.

Where a sole proprietary concern is converted into a company and that company gets amalgamated into another company, then the tax authorities may hold that the ex-proprietor has not held shares to the extent of 50% in the company for a period of five years, and therefore, the company should be subjected to tax under Section 47A(3).

As the law stands today, it exempts one step in the process of re-organisation, but if two steps taken together, then the exemption may get withdrawn. As this is clearly contrary to the   basic intention behind the provisions, it is suggested that clauses (xiii) and (xiv) may be amended to provide that the requirement of holding not less than 50% of the voting power by the ex-sole proprietors or the ex-partners need not be fulfilled, wherein the companies concerned get amalgamated into other companies.

It is therefore, suggested that under clauses (xiii)(d) and (xiv)(b), the following proviso may be added:

“Provided that the above condition shall not apply where a company gets amalgamated into another company.”