Stamp Duty for property transfer

Following representations received by the prime minister’s office (PMO) from both domestic and foreign private equity players in the past two months, Finance Minister Arun Jaitley is expected to consider the issues of scrapping stamp duty on transfer of properties by private individuals and firms to real estate investment trusts (Reits) and making dividend distribution tax (DDT) ‘pass through’ for Reits and investors in the trusts. Tax levies, including DDT and stamp duty issues, were flagged by top investment bankers and chief executives of companies like JP Morgan & Blackstone.

The real estate industry, equity investors and international trusts have represented to the government for granting “pass through status” for dividend payments by Reits. In effect, rental income from assets with the trusts would not be liable for tax as and when these assets or units are returned to the investors.

The demand for exemption from payment stamp duty and DDT was put forward after the government recently scrapped long-term capital gains tax on transfer of Reits units by their sponsors or investors. An exemption on payment of minimum alternate tax (MAT) when investors transfer shares to the Reit or on sale of Reits units was also granted by the Government recently.

Pending tax issues have been dissuading equity investors and real estate companies from making it big in real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), rating agency CARE said in a note. In his last budget, finance minister Jaitley had given hope to real estate companies looking to list their rent-yielding real estate assets through Reits. Reports from various analysts suggest that the potential for Reits listing in India was about $ 20 billion since in May, the Union cabinet allowed foreign investors to take exposure in Reits to bring in capital and reduce the debt liability of domestic real estate companies.

As per estimates made by real estate firm Raheja Group, the top seven cities of India have more than 400 million square feet of operational office space; of which, over 150 million sq feet would be ready for Reits listing by April.

The largest realty developer, DLF has announced plans to start two Reits, with one exclusively for commercial office space. The company plans to monetize about 30 million sq feet office and retail space by the end of this financial year.

“The government may not wait till presentation of Budget in February next year, instead, it may shortly notify the exemption on payment of stamp duty on transfer of properties to Reits,” confirmed a PMO official. “Exempting Reits completely from payment of DDT might need further discussion,” he added.

The real estate sector is considered as one of the most important sectors for the economic growth of the country. With very promising plan of providing housing to everybody maximum by 2020, the new government headed by Prime Minister Narendra Modi has taken a very important decision in making few amendments in the law related to the real estate sector.

Finance Minister, Arun Jaitley is encouraged to take pragmatic approach towards the current Income Tax Act scenario. Mainly real estate sector should be given some relief with some positive amendments in the Income Tax Act which will in-turn act as a booster for the growth of real estate sector.

Here are some key pointers for the Finance Minister:

• Loan amount with Higher deduction

In the previous years In 2001, Finance Minister has raised the interest deduction limit on housing loan from Rs 30,000 to Rs 1,50,000 for individuals and Hindu Undivided Families (HUF).

In the record history of last 14 years, the house prices have raised only. On the other hand, with high paying jobs people have better financial conditions which is further adding to investment costs. So, it is very evident that new real estate development and the investment, both, are going up.

But we should not forget that along-with increasing number of millionaires and multi-millionaires coming up, demand of housing is also rising constantly. Currently, the amount of deduction allowed for the housing loan is just Rs 1,50,000 per annum, which implies that on an average, just for Rs. 15 lakhs  a house can be purchased and the deduction for interest on loan being allowed up to Rs 1,50,000 only.

The government’s take on this for improving the real estate sector should be an increased deduction for interest on housing loan to minimum Rs 2,50,000 especially considering the rising prices.

• Developers with small housing projects should be given tax exemption

Currently, all the developers have too pay taxes on their income irrespective of the size of projects they are building, thus, even if a builder is developing a residential house of 1,000 sq ft he has to pay the taxes. So, if the government wants all the developers of India to construct affordable houses for the common man, it should grant exemption in the income tax to the developer and also developers should also be asked to reduce the selling cost. Such dynamic approach can help in resolving the housing problem in the country.

In fact, this type of provision was there before in the past, in which tax deduction was allowed through Section 80IB (10). According to which if a housing project was taken on minimum 1 acre of land and the houses were built up to 1,000 sq ft in metropolitan cities or 1,500 sq ft in other cities of India, the developer was provided with complete exemption.

• Reduce the Stamp duty rates

There is a different stamp duty rates in different states of India for all real estate transactions. If the government is really keen on a big growth in the real estate sector and would want to see a fast turnaround of property buying and selling transactions, then this is the time to implement the concept of stamp duty in India, which is widely applicable overseas where half per cent or one per cent stamp duty is payable.

• Investment restriction on commercial property

Currently, if a person is selling his residential/agricultural property, he can save tax on capital gains taxes through investment in another residential/agricultural property of his choice. But, in case of a commercial property, he can’t reinvest in any other commercial property or a commercial space in a mall or a shop. Hence, the current Income Tax Law should be amended for allowing investment in commercial property out of the sale of another commercial property in order to save tax or Long Term Capital Gains.

• Bring in the concept of Real Estate Investment Trust (REIT)

In the last few years, government did try to implement the concept of Real Estate Investment Trust (REIT) in the past which is already a well-developed business concept in many developed countries of the world. The government should make realistic rules and regulations for framing guidelines to set up REIT especially for the small investors there should be a provision to form REIT.