Mini-Budget 2009-10 for the real estate industry

The Finance Minister Pranab Mukherjee has proposed amendments to the Budget. It is customary for the FM to take in suggestions from various sides and introduce any necessary amendments. The FM has said that the priority was to provide a stimulus to economic activity.

The key beneficiaries of the amendments are construction and real estate companies. The logic seems to be that giving an impetus to the real estate sector will have a multiplier effect on the economy. The FM has voiced a hope that developers will pass on the benefits to home buyers, to encourage demand. That hope will be belied as real estate prices have already begun to rise in many areas. These tax benefits are likely to go into the pockets of builders. They have started citing the rally in stock markets, lower interest rates and a general recovery to home buyers as reasons why home prices can only go one way. Up.

Construction and real estate industry gets the lion’s share of the FM’s generosity

  • The government has given a major concession to the construction industry. It has extended the tax holiday given for housing projects meant for the middle class, with limits of 1000 sq.ft. houses in Mumbai and Delhi, and 1500 sq.ft. in other areas. This exemption had a sunset clause, for commencing construction on such projects, which expired in March 2007. The developer could claim a tax benefit on income from such projects for a period of four years.
    The government has now allowed even those projects which began construction between April 1, 2007-March 31, 2008 to avail of the tax exemption under this clause. The builder lobby will rejoice at this development. All the large projects started in this period came to a standstill as funds and demand dried up at the same time. The profitability of these projects will undergo a drastic change overnight as the profits from these sales will be exempt from tax.
  • On houses worth up to Rs 20 lakh, the government will provide an interest concession on loans up to Rs 10 lakh. The government has set aside an amount of Rs 1,000 crore for this head. In metros, this move will benefit low cost housing projects and also the purchase of smaller houses in the distant suburbs. This will make life easier for the numerous builders in the country who operate in the suburbs. Large builders too have launched mass housing projects. The impact will not be very substantial but is symbolic and meant to encourage buyers to stop sitting on the fence.
  • The government has also extended the sunset clause for the Industrial Park Scheme by two years and it will now expire in March 2011. Construction of most such projects would have been delayed as falling demand and high levels of debt stretched developers. Now, as the economy shows signs of a revival, builders will be able to complete these projects and still get the tax benefits.
  • The government has now exempted agencies that maintain and repair roads. Earlier, only road construction was exempt from service tax. This will benefit standalone service providers of road maintenance services. In addition, where road projects involve a component of operations and maintenance, the fees levied by the contractor for maintenance will be exempt from service tax.

Oil & Gas Exploration: Natural gas from coal bed methane goes tax-free

  • The government had amended a key clause, allowing companies who were drilling for gas to get the same tax benefits available to those drilling for oil. Now, the government has extended this benefit for the production of natural gas in blocks licensed under the IVth round of bidding for exploration of coal bed methane. This will make it more attractive for the bidders participating in the process, which is now slated to close in October 2009.

Food Processing Tax Benefits, not just for vegetarians

  • Companies that process foods like dairy products, meat, poultry and marine products will get the same tax benefits that fruit and vegetable processors get. The government is amending Section 80-IB to include these new items also in it, to become eligible for a tax holiday on the creation of infrastructure for processing these perishable items.

Service Tax becomes effective September 1

  • The levy of service tax on new services, proposed in the Budget will take effect from September 1, 2009. This effectively means the government will get revenues for six instead of seven months in the current fiscal. This is not a material change but generates some goodwill for the finance minister.

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