The newly elected Government has presented a forward looking and progressive Union Budget 2014–15. It managed to touch upon all topical issues of reviving economic growth, attracting investments, churning industrial production, promoting urban development, and creating infrastructure. The budget struck a fine balance between fiscal prudence and populism, and managed to provide the government’s thought process on contentious issues such as retrospective taxation and fuel / food subsidies. 
 
The Government declared that the GDP is likely to grow by 5.4 - 5.9% in the current fiscal, thereby moving beyond the sub-5% growth witnessed in the past two years. The fiscal deficit would also be reduced from the present 4.5% to 4.1% by 2014-15 and 3% by 2016-17. These are clear signals that the Government has already embarked on an ambitious economic recovery plan.
 
Following are some of the key points from the perspective of the real estate and construction sector:
 

Relaxation in Foreign Investment Guidelines: A relaxation of Foreign Direct Investment (FDI) norms in the housing sector was announced, with major policy revisions including the reduction in the minimum capitalization from US$10 million to US$5 million for wholly-owned subsidiaries; and trimming the minimum area of construction projects from a carpet area of 50,000 sq. m. to 20,000 sq. m.

 
The real estate sector has already attracted FDI worth approximately US$ 13 billion between the years 2005 – 2014. However, this was just about 4% of the overall FDI received by the country during the period. In the previous fiscal alone the total investment received by the sector was worth approximately US$ 1.23 billion, which was only about 3% of the overall FDI received. Hence, relaxation in entry norms may provide a fillip to the quantum of investments going into the sector, particularly in tier II and tier III cities. This would also connect well with the overall Government objective of churning urban development and creating a ‘100 new smart cities’ in the country. 
 

Pass through Status to Real Estate Investment Trusts (REITS): The much-awaited clarity on taxation of REITs was provided by the Government, which directed the Securities and Exchange Board of India (SEBI) to introduce the funding instrument soon. Long term capital gains and dividends to investors have also been made tax free. At the same time Infrastructure Investment Trusts (for Public Private Partnership arrangements in infrastructure projects) were also provided a similar pass through status. 

 
At a time when the realty sector is struggling for alternate avenues of funding and private players are sourcing institutional capital, permitting REITS can act as a key enabler for capital markets in the country, and provide investors with exit options. The entry of REITS paves way for increased liquidity for developers, promotes transparency in the sector and provides retail investors income and appreciation benefits from well performing real estate assets. Although a detailed clarification on the tax structure for REITS is still awaited, nonetheless this is a positive move that would go a long way in reviving global investor sentiments.  
 
Promotion of Low Cost Housing: Low cost affordable housing projects for the urban poor are to be exempt from the FDI restrictions, besides the Government has allocated Rs. 4,000 crore through the National Housing Board (NHB) for providing cheaper loans for low cost housing to support the ‘housing for all by 2022’ scheme. Additionally, Rs. 8,000 crore has been allocated for the rural housing scheme under NHB.
 
Urban Development Initiatives: A 100 SMART Cities are to be set up as satellite towns to existing cities, at a budget allocation of Rs. 7,060 crore (initially seven industrial smart cities are to come up). These are to be linked through industrial corridors—for a budget allocation of Rs. 100 crore—connecting 20 new industrial clusters to be set up along the Golden Quadrilateral. 
 
Infrastructure Creation: In line with the Government’s commitment to infrastructure creation and growth in the manufacturing sector, six new textile clusters are to be set up, along with two new bio-technology clusters. Budgetary allocations have also been made for new Metro rail projects, more airports at tier-I and II cities, widening the transport and highways network (Rs. 37,800 crore to NHAI), 16 new port projects, outer harbor port projects (Rs. 11,600 crore), and a world class convention center, amongst others. Banks have also been encouraged to provide long-term loans to the infrastructure sector, with minimum lending regulations in place. 
 
Opening up of the Insurance Sector: Revised ceiling for foreign investment in the insurance sector from 26% to 49% shall bring in funds in the long term in the real estate and construction sector. Industry estimates point to approximately US$ 20 billion worth of investments waiting to happen in the insurance sector through the FDI route over the next few years. Post reaching a certain maturity stage one can assume that portion of these funds may get diverted to the real estate sector as well. This could provide an alternate avenue for investment to the sector in the long run. 
 
Special Economic Zones: Although the Government did not clarify on Minimum Alternate Tax and Dividend Distribution Tax on SEZs, it did convey its commitment to take effective steps to operationalize SEZs to use unutilized land. The Government also announced its commitment to take effective steps in the near future to transform SEZs into instruments of industrial production, employment generation and export promotion. 
 
Personal Tax Modifications: As far as personal savings and tax regulations go, the home loan interest exemption limit has been hiked from Rs. 1.5 lakh to Rs. 2 lakh. Although the increase is small but could have an impact in encouraging purchase of homes. 
 
In Conclusion
 
“The biggest announcement for the real estate sector was the Securities and Exchange Board of India (SEBI) being directed to introduce Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts in India. We expect the entry of this much-awaited investment instrument to provide alternative funding channels to the realty sector. Going forward, it will also act as a key enabler for capital markets in the country, and provide investors with exit options. I perceive this announcement as the single most consequential reform witnessed in the sector in recent times and will have significant positive impact on the real estate market in times to come. However, the tax treatment of this REIT structure needs to be examined in detail.
 
Overall, this was a good budget and will stimulate growth in the real estate and infrastructure sector in the long term. However, the real impact on the economy and the sector will be felt upon  investing all the funds allocated in the Budget through project implementation, with a sense of urgency.” 
 
 
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