CREDAI
Pre-budget Recommendation 2011-12
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.
1
Contents
Part I - Recommendations on Procedural aspects
Part II - Recommendations on Revenue impacting
aspects
Part III - Other 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.
2
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
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.
3
Direct Tax
Recommendations
CREDAI
© 2010
2010 KPMG,
KPMG, an
an Indian
Indian partnership
partnership and
and aa member
member firm
firm of
of the
the KPMG
KPMG network
network of
of independent
independent member
member firms
firms affiliated
affiliated with
with KPMG
KPMG International,
International, aa Swiss
Swiss cooperative.
cooperative. All
All rights
rights reserved.
reserved.
©
4
Tax holidays to Industrial Parks - Section 80-IA (4)(iii)
Issue
•
Impact
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
CREDAI
Recommendation
•
•
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
•
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.
© 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
Tax holidays to Industrial Parks - Section 80-IA (4)(iii)
Issue
•
Impact
Benefits available only on
completion of projects
CREDAI
•
Applications were made in the
intervening period April 2006 till
the introduction of Industrial
Park Scheme 2008 are pending
approval
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.
© 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.
6
Tax holidays to Industrial Parks - Section 80-IA (4)(iii)
Issue
CREDAI
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
© 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.
7
Conversion of Company into a Limited Liability
Partnership
Issue
Impact
•
Threshold limit of rupees sixty
lakhs as prescribed in subclause (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’
CREDAI
Recommendation
•
Companies awaiting to convert
into LLP which is an alternate
corporate form of business have
to fulfill conditions under the
provisions of Act
•
Need to rationalise the LLP
regulation with the existing laws
on amalgamation, demerger,
conversion of partnership firm
into company
•
Use of LLP as a form of business
is facing several regulatory
hurdles also
•
Limit of rupees sixty lakhs
should be enhanced to a limit of
rupees one crore
•
Real estate companies severely
impacted as income from other
sources includes interest,
dividend etc forms substantial
part of the total income
•
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.
© 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.
8
Other Recommendations
Issue
•
TDS on rental income
–
•
•
Impact
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.
CREDAI
•
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
•
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.
•
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
•
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
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
Recommendation
© 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.
9
Indirect Tax
Recommendations
CREDAI
© 2010
2010 KPMG,
KPMG, an
an Indian
Indian partnership
partnership and
and aa member
member firm
firm of
of the
the KPMG
KPMG network
network of
of independent
independent member
member firms
firms affiliated
affiliated with
with KPMG
KPMG International,
International, aa Swiss
Swiss cooperative.
cooperative. All
All rights
rights reserved.
reserved.
©
10
Procedure of Customs endorsement of Bill of Entry for
availment of Cenvat credit by end user
Issue
•
Impact
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.
CREDAI
•
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
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
© 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
Credit of Service tax on construction activity against
output renting of immovable property
Issue
•
Impact
Non-availability of credit of
Service tax on construction
activity against output Service
tax liability for renting of
immovable property
CREDAI
•
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
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
© 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.
12
Service tax under Joint Development Agreements
Issue
•
Impact
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
CREDAI
•
Levy of Service tax under JDA,
on built-up portion provided by
developer to land owner results
in increase in construction cost
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 providerservice 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
© 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.
13
Services provided by a sub-contractor to main
contractor in SEZ
Issue
•
Impact
Currently exemption for Service
tax is not available to subcontractor when service
provided to the main contractor
in SEZ
CREDAI
•
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 subcontractors to SEZ unit or
developer are not eligible for
exemption from Service tax, thus
resulting in increased project
costs
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
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14
Cenvat credit on advance payments
Issue
•
Impact
Advances are usually issued by
the developer/ contractors.
Service tax liability becomes due
immediately on receipt of such
advances
CREDAI
•
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
Recommendation
•
It may be clarified that the
Service tax paid on advance
payment should also be allowed
immediately as CENVAT credit
© 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.
15
Full credit of capital goods in the first year itself
Issue
•
Impact
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
CREDAI
•
Non-availability of full credit in
first year leads to blockage of
funds and hence impacts the
working capital
Recommendation
•
Credit Rules should be suitably
amended for availment of entire
duty paid on the capital goods in
the first Financial Year itself
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16
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
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.
17
Part II - Revenue Impacting Recommendations
Indirect Tax
GST
Service Tax
Excise Duty
Cenvat Credit
CST
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.
18
Direct Tax
Recommendations
CREDAI
© 2010
2010 KPMG,
KPMG, an
an Indian
Indian partnership
partnership and
and aa member
member firm
firm of
of the
the KPMG
KPMG network
network of
of independent
independent member
member firms
firms affiliated
affiliated with
with KPMG
KPMG International,
International, aa Swiss
Swiss cooperative.
cooperative. All
All rights
rights reserved.
reserved.
©
19
Tax deduction to first time home buyers
Issue
Impact
•
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
Recommendation
•
•
•
CREDAI
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
© 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 Holiday for housing projects - Section 80IB(10)
Issue
•
•
•
•
Impact
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
CREDAI
•
•
•
•
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
Recommendation
•
•
•
•
•
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
© 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.
21
Deduction for principal repayment of a housing loan Section 80C
Issue
•
Impact
Present limit for deduction under
section 80C is INR 100,000
CREDAI
•
Increasing the threshold limit for
the deduction would provide
relief to the middle class
•
Increase disposable income in
their hands
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
© 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.
22
Capital gains
Issue
Impact
Recommendation
•
36 months holding period for
qualification as a long term
capital asset
•
Encourage investment in real
estate and to provide liquidity to
investors
•
Reduce the holding period for
qualification as a long term
capital asset to 12 months
•
Tax @ 20 percent on long term
capital gains on transfer of
house property
•
Rate of 20 percent introduced
when the maximum marginal
rate was 50 percent
•
Reduce the tax rate on long term
capital gains on transfer of
house property to 10 percent
•
•
Base year for indexation
•
Long time since the base year
for indexation not updated
•
Base year for indexation be
changed every 10/15 years
•
Restriction on the exemption of
acquisition of one residential
house is a deterrent to the object
of boosting the housing
•
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
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
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.
23
Rental income
Issue
•
Impact
Incentives to promote rental
housing
CREDAI
•
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’
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
© 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.
24
Section 14A of the Act & Rule 8D of Income Tax Rules,
1962 - Expenditure in relation to income not includible in
total income
Issue
•
•
Impact
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.
CREDAI
•
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 relooked
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
.
© 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.
25
Section 14A of the Act & Rule 8D of Income Tax Rules,
1962 - Expenditure in relation to income not includible in
total income
Issue
Impact
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
•
CREDAI
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
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
© 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.
26
Wealth Tax - Urban land held as stock in Trade [Section
2 (ea)]
Issue
•
Impact
Urban land held as stock in trade
by developer is taxable
CREDAI
•
Adversely impacts real estate
developers as land is held by
them as stock in trade
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
© 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.
27
Indirect Tax
Recommendations
CREDAI
© 2010
2010 KPMG,
KPMG, an
an Indian
Indian partnership
partnership and
and aa member
member firm
firm of
of the
the KPMG
KPMG network
network of
of independent
independent member
member firms
firms affiliated
affiliated with
with KPMG
KPMG International,
International, aa Swiss
Swiss cooperative.
cooperative. All
All rights
rights reserved.
reserved.
©
28
GST Recommendations
Issue
•
Recommendation
Official documents released till
date on GST do not divulge any
details about levy/ non levy of
GST on real estate transactions
CREDAI
•
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
© 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
Service tax - Real estate
Background
•
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
CREDAI
Impact
•
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
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.
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30
Service tax - Real estate
Background
•
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)
CREDAI
Impact
•
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
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.
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31
Service tax - Real estate
Background
CREDAI
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.
© 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.
32
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:
•
CREDAI

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
© 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.
33
Service rendered to SEZ
Issue
•
Impact
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
CREDAI
•
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
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
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34
Excise Duty Rates
Issue
Impact
•
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
CREDAI
•
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
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
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35
Credit of inputs in case of composition scheme followed
by the works contractor
Issue
•
Impact
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”
•
•
Non-availability of credit of
inputs leads to cascading of tax
and hence results in increase in
the project cost
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
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
* Notification No. 32/ 2007-ST, Dated 22 May 2007 as amended by Notification No. 23/ 2009 – ST, dated 7 July 2009
CREDAI
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36
List of common services on which full credit should be
available
Issue
•
Impact
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.
CREDAI
•
Non inclusion of certain key
services like Business Auxiliary
services, Business Support
Services etc. leads to denial of
credit and hence additional tax
costs
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
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37
Cement and Bricks should be included in the existing
list of ‘Declared goods’
Issue
•
Impact
Cement and Bricks are not
included in the existing list of
‘Declared goods’
CREDAI
•
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.
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%.
© 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.
38
Form ‘C’ for Construction Activities
Issue
•
Impact
Concessional benefit under the
Central Sales Tax Act, 1956 is
not available to Construction
activities
CREDAI
•
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.
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 interState 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]
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39
SEZ exemption from payment of CST on supplies by
sub-contractor to the main contractor
Issue
•
Impact
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
CREDAI
•
Absence of provision for
issuance of Form I by the main
contractor so that subcontractors can also claim CST
exemption, results in additional
tax costs
Recommendation
•
Provision for issuance of Form I
by the main contractor so that
sub-contractors can also claim
such CST exemption, should be
incorporated
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40
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
CREDAI
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41
Interest Subsidy for Housing the Urban Poor
Background
•
•
•
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
CREDAI
Impact
•
•
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
Recommendation
•
In addition, there are a lot of
formalities involved under the
ISHUP scheme and therefore it is
not extremely easy
•
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
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42
Building & Other Construction Workers’ Welfare Cess
Act, 1996
Background
•
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
CREDAI
Impact
•
•
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
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
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43
Slum Redevelopment Projects/ Dilapidated Housing /
Social Housing
Issue
•
•
•
•
•
Impact
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
CREDAI
•
•
•
•
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
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
© 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.
44
External Commercial Borrowings
Issue
Impact
•
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
CREDAI
•
ECBs are alternative source of
low cost borrowings
•
•
Help developers to optimize cost
•
REMF in its present form is a
dampener for the Real Estate
industry
•
Savings in cost could be passed
on the ultimate consumers
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
Effort should be made to reduce
the transaction cost of housing
and discourage black money
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45
Other Issues
Issue
Impact
•
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
CREDAI
•
The present section allows
deduction to only banks
equivalent to 10% of the value of
the assets that too for doubtful
and loss assets
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
© 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.
46
Thank You
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.
© 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.
47