tax in real estate
TRANSCRIPT
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Real Estate Tax and Regulatory regime
Contents
1. Introduction
2. Overview of Relevant regulations
3. FDI in Real estate
Conditions
Issues for consideration
Funding options
4. Affordable housing sector
5. Listing of properties outside India
6. Income tax aspects
7. Indirect tax aspects
8. Accounting issues
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Real estate in India Key drivers
Economicgrowth &
prosperity isdriving demand
for real estatein India alongwith a large
and growingurban & youth
population
669769
8821,001
1,146
1,344
-
400
800
1,200
1,600
FY06 FY07 FY08 FY09 FY10 FY11
USD
perannum
Per capita income
Economic growth and prosperity to drive demand forreal estate
1,153
1,843
2,738
-
500
1,000
1,500
2,000
2,500
3,000
2007 2011 2015
USD
BN
India's GDP* Growth
Source: Datamonitor, US Census Bureau, Of fice of the Registrar General & Census Commissioner
(India), IMF W orld Economic Outlook
Slide 3
Real estate in India :Demand is expected to be strong across residential,commercial office and retail space
Source: CRISIL, Cushman & Wakefield, PwC research & analysis
Growth drivers Economic growth,
population expansion, increasingincome levels and the rapid growthin organized retail
Indias retail market size isexpected to grow at a CAGR of 15 -20% over the next 4 years to reachover USD 850 BN
Indias Organised Retail Penetration isexpected to increase from 6.5% to 9.2%
by 2015
2.6
3.9
-
1
2
3
4
5
2011 2015
MNunits
India Residential
Growth drivers Population growth,rapid urbanization, decreasinghousehold size, increase in working agepopulation and increase in income levels
Widening demand supply gap -Urban housing shortage expected toincrease from 20.5 Mn in 2010 to 21.7MN units in 2014
Localized, fragmented marketpresents opportunities forconsolidation
Residential Space
127
160
-
40
80
120
160
200
2010 2014
Mnsq.
ft.
Commercial Office Space Demand
Growth drivers Global and Indian
economic growth, domestic demand,export growth and increase in workingpopulation skill sets
IT/ITeS and BFSI would continue to
account for 60-70% of the officedemand
Labour force estimated at ~490 MN(2011); expected to grow at a CAGR
~2.3% to reach ~550 MN by FY16
Commercial Office Space Commercial Retail Space
16
57
-
10
20
30
40
50
60
2011 2015
dd
Commercial Retail Space Demand
CAGR- 11% CAGR
- 6% CAGR- 37%
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Overview of Indian Regulatory & Tax Regime
Slide 5
Key Relevant Legislations
ForeignInvestment &
Exchange Control
Foreign DirectInvestment
Policy
ForeignExchange
ManagementAct
Related Rules,Regulations and
procedures
CorporateLaws
Companies Act
Related Rules,Regulations and
procedures
Fiscal Laws Direct Taxes
Income-tax Act
Wealth Tax Act
Fiscal Laws Indirect
Taxes
Customs Act
Central ExciseAct
Service Taxlegislation
Value AddedTax (VAT)legislation
Central SalesTax Act
Other keylegislations
Indian StampAct
Intellectualproperty right
laws
Labour laws
Environmentallaws
IndustrialLicensing Policy
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FDI in Development & Construction Activity
Slide 7
Background
Historically highly regulated FDI permitted in limited sectors
Recent policy measures opened up the sector for FDI
March 2005 FDI guidelines allowing 100% in few real estatesegments
Currently, FDI in real estate is allowed 100% through automaticroute subject to conditions to be satisfied
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Real Estate Sector
Real
estatesector
Development ofSEZ
Educationalinstitutions andold age homes
Industrial Park andinfrastructure
facilities for thepark
Hotels, resorts,Hospitals
Residential townships,
housing
Commercial
premises,Recreational
facilities
Conditions to be satisfied
100% FDI permitted
Slide 9
Construction development Conditions for FDI
Serviced housing plots min 10 hectares; Construction-Development projects 50,000 sq.mts Combination project any one of the above
Minimum Hectarerequirement
USD 10M for WOS USD 5M for JV
MinimumCapitalizationrequirement
Funds should be brought in within 6 months from thedate of commencement of business
Realisation
3 yrs from minimum capitalisation 3 yrs applied from date of receipt of each tranche of FDI
and completion of min cap Which ever higherLock-in-period
50% should be completed within 5 yearsCompletionpercentage
Bye-laws, rules and regulations of StateGovernment/Municipal/Local bodies
Responsible for obtaining all necessary approvals
Compliance tonorms/standards
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Industrial Park Conditions for FDI
Plots of developed land+built up space or combination with common facilities developed and allotted for ind ustrial activity
Industrial Park -Meaning
Means manufacturing, electricity, gas and water supply, post andtelecommunications, software publishing, consultancy and supply, dataprocessing, database activities, and distribution of electronic content, othercomputer related activities, basic and applied R&D on bio-technology,pharmaceutical sciences/life sciences, natural sciences, and engineering, businessand management consultancy activities, and architectural, engineering and othertechnical activities
Industrial activity
Plots of developed land net area excluding common facilities Built up space floor area and built up space for common facilities Combination site area and floor area available for allocation excluding site area
and built up space for common facilities
Allocable Area -Meaning
Minimum of 10 units No single unit shall occupy more than 50% of allocable area
Minimum unitsrequirement
Minimum 66% of allocable area to be allocated for Industrial activityAllocation for Industrial
Activity
Slide 11
Issues for consideration
Minimum area Built up area definition Super built up or carpet area?
Minimum Capitalizations with funds to bebrought within 6 months - Clarity on
definition, start, end of 6 months
Restriction on repatriation of originalInvestment restriction on investment orinvestor
Timeline for development of the project consequence and remedy?
Commercial complexes Vs. IndustrialParks
FDI in company with Mixed projects
Lock-in-period Investor or Investment?
Exit to another non-resident
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Funding options
Instrument Feasibility Profitrepatriation
Capitalrepatriation
Equity Extensivelyused
Dividend Nocap
Restrictive Buyback/CapitalreductionCompulsorily
ConvertiblePreferenceShares(CCPS)
Dividend Subject to cap
Compulsorilyconvertible
debentures (CCD)
Interest Subject to cap
ExternalCommercialBorrowing(ECB)
Permitted onlyfor IndustrialPark
Interest- Subjectto cap
High flexibility
Non ConvertibleDebentures(NCD)
For FIIs onlyMust be listed
Interest subjectto cap
High flexibility
Slide 13
Affordable housing sector key aspects
Key focus by the Government in India
Regulatory initiatives through Finance Act, 2012
ECB opened up for this sector Capital/funding
Credit guarantee Trust Fund continuation of interest subventionscheme for another year
Tax incentives through Finance Act, 2012
Enhancing Investment linked deduction of capital expenditure 10150%
Service tax exemption specified construction services and low costmass housing
Interest payments on ECB - Lowering tax rate to 5%
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Listing of Commercial properties outside India
Management
&
Performance
Fee
Mgmt Co.
IHC
SEZ Projects
Sponsor
Project SPV1
Investors
BusinessTrust
Project SPV 2
Singapore
India
Listed onSGX
Listingoptions
Debt
Instruments
REITs / Business Trusts
(for certain typesof assets)
Private Offering (Funds / GDR)
Offering to institutions & highnet worth individuals
Public offering of shares (shares /SDR)
Offering to institutions, high networth & retail investors
Slide 15
Taxation of Real Estate Sector
Direct Tax
Indirect Tax
Stamp duty
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Direct Tax
Tax incentivesunder Income Tax
Act:
1. SEZ Developers
2. Housing projects
3. Industrial Park
Tax issues faced by industry:
1. 14A disallowances
2. Income Characterization
Business Income Vs. House Property BusinessIncome Vs. Capital Gains
3. Joint Development Agreements Issues andplanning avenues
4. AOP taxation
New issues in lightof Finance Act,
2012:
1. Domestic TP
2. GAAR
Slide 17
Tax incentives for real estate sector
Sec 80-IABSEZ developer
Conditions Profits and gains from the business ofdeveloping a SEZ notified on/after 1st April 2005
Tax incentives - Deduction of 100% of the profits andgains for 10 consecutive yrs out of 15 yrs
Sec 80-IB -Developingand building
housing project
Conditions :
Approved by a local authority before 31st March 2008 Min area 1 acre of land ; Residential unit min bui lt up 1000 1500 sq ft Built up area of shops and commercial eshtablishment not more than 3% of
aggregate built up or 5000 sq ft which ever higher Conditions on allotment of residential houses
Tax incentives: 100% of profits from such housing project
Sec 80-IAIndustrial Park
Conditions:
Develops,operates,maintains and industrial park
After 1st April 1997 and before 31st March 2011
Tax incentives: 100% of profits for 10 consecutive years
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Tax issues faced by Real Estate Industry
Disallowances u/s14A
Characterization ofIncome
AOP Taxation
Joint DevelopmentAgreements
Slide 19
Disallowances under section 14A
Section 14Ainsertedin 2001, with
retrospective effect fromAY 1962-63
No deduction to beallowed for expenditure
relating to exemptincome
(14A disallowance)
Disallowance to becomputed as per
prescribed formula^(Rule 8D)#
The
Present
Hon'ble SC* held thatif exempt & taxable
income earned fromindivisible businessthen expenditure not
to be apportioned
Contentious issue subject matter of
substantial litigation
Assessees claimedexpenses relating to
exempt income
The
Past
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Sec 14A contd.
Rule 8D
* Only those investments, income from which does not / shall not form a part of the total income
Aggregate
Disallowance
Expenditure havingdirect nexus withexempt income
Interest cost
(as per the formulaprescribed)^
0.5 % of avg. ofinvestments*
Notification dated 24.03.2008 amended the Income-tax Rules by insertion of Rule 8D
Interest expense of the current year X Avg. value of investments *
Avg. Total Assets appearing in the Balance Sheet
^ Prescribed formulato determine interest
cost
Slide 21
Sec 14A contdConcern for Real estate business run through SPVs
Results indisallowances
and highertax outflow
Expendituredisallowedeven if no
incomeearned?!
May be aconcern whenbusiness isnecessarily
run throughSPVs
Balance Sheet
Approach
No flexibilityto exclude
investmentsout of owned
funds
Blanketminimum
disallowanceof 0.5% of
investments
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Income Characterization:
Real estate developer
Residential complex Commercial complex
Held as stock-in-trade
Profits taxed asBusiness Income
Held as Capital asset
View 1 : Developerin the business of
leasing out
Profits taxed asBusiness Income
View 2 : Rent frombuilding / land to be
taxed under HouseProperty
Profits taxed asHouse Property
All costs & depreciation allowed Only 1/3rd standard deduction
Taxability of units leased out > 12 years?
Slide 23
Joint Development Agreements
Taxation onentering JDA
Drafting of JDA Granting of
License toDeveloper
Sec 53A ofTransfer of
Properties Act
Transfer taxed asCapital Gains in
the hands ofDeveloper on
date of JDA
Taxation on saleof completed
residentialapartments
Taxed in the yearin which sale takes
place
Normally taxed asCapital gains
Taxed asBusiness Incomeif Land owner is in
business ofdeveloping
Taxation in the hands of Land Owner
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Joint Development Agreements
Taxation on sale ofcompleted units
Taxed in the yearin which revenue
is recognized
Taxed asBusiness Income
Taxation of SPVs for
commercialcomplexes
Income taxed asCapital gains
Lease rentals maybe taxed as House
Property incomedepends on drylease/wet lease
Taxation in the hands of Developer
Slide 25
AOP Taxation issues
existence of two or morepersons
coming together for acommon purpose
common action on part ofthe constituent members
Joint and several liability
common object ofproducing income by thecommon action
Fundamental tests for determinationof AOP
Risk of AOP between Landownerand Developer triggered
Tax issues of AOP: Developer/SPV isCompany MAT
would be applicable Results in doubletaxation ???
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Finance Act, 2012 - Tax issues for Real Estate
Domestic TransferPricing
General Anti-Avoidance Rules(GAAR)
Slide 27
Domestic Transfer Pricing
Transactions between related parties
As referred in section 40A(2b), transfer ofgoods/services as per 80A, 80-IA(8),80-IA(10),10AA
Where aggregate of such transactions exceeds 5crores
Computation of Arms length price As specified u/s92C
Real estate sector SPV model impacts intercompany transactions
More documentation and procedural formalities
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GAAR - Overview
GAARnotapplicable
Does the arrangement contain any of 4tainted elements
Arrangement is Impermissible Avoidance Arrangement
No
No
No
Yes
Yes
Is there an Arrangement to obtain taxbenefit?
Was the main purpose or one of the mainpurpose to obtain tax benefit?
Not at arms length
Misuse or abuse of the Act
Lacks commercial substance
Not for bona fide purposes
Disregard/recharacterise
Lift corporateveil
Treaty overrideChange place of
residence or situs
Reallocateincome/expenses
accrual/ receipt
Recharacteriseequity-debt,
income-expense
Yes
Consequences thereof includes:
Yes
Slide 29
GAAR Issues for real estate sector
JDA StructuringCharacterization
of IncomeAvailing Tax
incentives
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Treaty provisions relating to sale of immovable
propertyMeaning as per Domestic LawPlus : Certain inclusionsMinus: Certain exclusions
Direct Use, letting, use in any other formIP used for the performance of Independentpersonal services
May be taxed in the state in which the
Immovable property is situated
Definition of ImmovableProperty
Taxability of Income
Income derived fromImmovable property
Income derived from alienation of shares assets of which consist wholly/principally ofImmovable property taxed in the state in
which Immovable property is situated
Taxability of Capital gain
Slide 31
Real estate Indirect Tax Issues
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Real Estate Indirect Tax Issues
Value Added Tax (VAT)
Three options fordetermining the sale priceof the goods andcomputation of VATpayable:
OPTION I : DEDUCTIONMETHOD
OPTION II : IF THEVALUE OF LABOURCANNOT BE IDENTIFIED
OPTION III :COMPOSITION SCHEME
Construction Contracts could be classified as aworks contract
Works contract essentially means a compositecontract involving both the supply of service as
well as the supply of goods
- VAT is generally discharged on the sale price ofthe goods. In the case of a works contract, thesale price or taxable turnover is arrived at bydeducting certain labour and other element
from the bill amount- There are basically three options for
determining the sale price of the goods andcomputation of VAT payable
Slide 33
Real Estate Indirect Tax IssuesService Tax
In the Union Budget 2012-13, it is proposed to exemptservice tax on services of
erection, construction ormaintenance of pipeline,conduit or plant for
drinking water supply
water treatment
Sewerage treatment ordisposal
Service tax is levied on specified services renderedor received in India.
In case of construcation contracts, the designingand drawing, civil works, installation andcommissioning, site testing, training services,operation & maintenance would be taxable underservice tax
The tax rate at present is 10.30% and will be12.36% from 1-04-2012
In Union Budget 2012 13 ,it is proposed to levyservice tax on all activities except specifiedservices in the negative list. This would impact thetax consideration for the construction projects
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Accounting issues guidance notes
ICAI has recently issued guidance note on Accounting for Real Estate Transactions
Revenue recognition as per percentage of completion method AS 7 on satisfyingfollowing conditions:
Significant risk and rewards transferred
Handed over possession
No significant uncertainty on amount of consideration
Not unreasonable to expect ultimate collection
Additional conditions to be satisfied for revenue recognition:
All critical approvals and clearances are obtained
Expenditure incurred on construction and Development is more than 25% oftotal cost
At least 25% of saleable project area is secured by contracts or agreementswith buyers
At least 10% of the total revenue are realized at the reporting date reasonable to expect that the parties will comply with payment terms
Slide 35
QUESTIONS & ANSWERS
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Thank You
2012 PricewaterhouseCoopers Private Ltd. All rights reserved. PwC, a r egisteredtrademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or,as the context requires, other member firms of PwC I nternational Limited, each of which is aseparate and independent legal entity.