The budget  for FY 2016-17 has not only addressed some of the real estate industry issues, but also laid a path and given direction to the economy. It has tried to induce rural demand by giving incentives to the rural development schemes. It also proposes to contain the fiscal deficit to 3.5%, which is good in-principal; however the increase in the tax revenue collection has been projected at 11.7%, which is aggressive. Total budgeted outlay of INR 2.21 lakh crores earmarked for infrastructure including INR 2.18 lakh crores on roads and rail for 2016-17, 22% higher from the previous fiscal year. Increased expenditure in developing infrastructure is a key step towards sustaining and improving the growth momentum. Infrastructure initiatives will attract further investments in other allied sectors. The budget also gives a lot of momentum to start-ups and this will be good for the economy as it will attract investments.

Real Estate after long had something to cheer about. This time the government had something to offer to real estate and at least it seemed that the finance minister had real estate on his agenda, specially housing.

There were a number of measures announced in the budget that will have a direct positive impact on real estate. These are:

1.       A developer would get 100% exemption from taxes for constructing houses up to 30 sq. m. in metros and 60 sq. m. (carpet area) in other cities. Cost of such units should be below ₹50 lakhs and to be approved between June 1, 2016 and March 31, 2019. But, the government has levied some stringent conditions to avail of this benefit. These are :

• Plot area of the project should be at least 1,000 sq. m. and unit size below 30 sq. m. (322 sq. ft) and within 25 kms from the municipal limits of Delhi, Mumbai, Chennai and Kolkata and plot area should be at least 2,000 sq. m. and unit size below 60 sq. m. (645 sq. ft.) carpet area in other cities.

• Every project will have only one residential unit allotted to a buyer and his family. For instance, if an individual has been allotted a unit in the project, the individual, spouse or minor children cannot be allotted another residential unit.

• For getting tax benefit, the projects should get approval between June 1, 2016 and March 31, 2019. If the project has received approval more than once, then the government would consider the first approval date when the said project was approved. Completion certificate from the competent authority will be considered.

• Also, the retail and commercial component of the housing project shouldn’t exceed 3% of the total built-up area of the project. The project should utilize at least 90% of the permissible Floor Area Ratio (FAR)/Floor Space Index (FSI) in the four metros and 80% in other cities. The developer will also have to maintain separate book of accounts for such projects.

• Minimum 'alternate tax' will however be still applicable for such projects at the rate of 18.5% with a tax credit available for 10 years. This is a welcome move, however the limit of 30 sq.mt. imposed on metro cities is on the lower side and this should have been 40-45 sq.mt. if the unit has to be livable for a family of 4 or 5. A 30 sq.mt. dwelling will result in small units with a 8x10sq.ft. bedroom, 10x15sq.ft. living room, toilet and kitchen of 5x7sq.ft. each and a balcony (free of FAR and carpet area). This dwelling unit will have a low circulation space and no utility space.  The limit of 60 sq.mt. in tier 2 towns is a good livable space, which can accommodate two bedrooms of 12x10sq.ft. and living room of 12x15sq.ft. , besides one toilet and kitchen of 5x7sq.ft. each, circulation space and utility space of 150 sq.ft. and a balcony (free of FAR and carpet area). We have seen that the demand for 1 and 2 BHK is high even in tier II towns like Dehradun, Nashik, Mysore etc., and this is a move in the right direction.

Impediments in implementation
Bottlenecks in the implementation of this kind of development are as follows:

a)      Density restriction in states like Haryana, 60 units per acre only.
b)      Minimum land area for permitting Group Housing (min 10 acres in Haryana)
c)      One car park per flat can be a spoil sport as this can make the project cost will escalate.

The budget proposes to build these units on plots of even 1000 sq.mt. in Tier I cities and 2000 sq.mt. in tier II cities. Our analysis shows that unless some states that have rigid density, minimum group housing area and parking norms do not modify the norms, the developers in these states may not be able to take any benefit. The table below shows that this benefit accrues to western and southern states.

City	FSI	Plot Size	Max DU's Permitted	Total Carpet area	Max DU size for tax exemption	DU's to be allowed to get tax benefit
Ghaziabad	2.75	1000	20	2475	30	83
Gurgaon	1.75	1000	15	1575	30	53
Pune	1.5	2000	90	2700	60	45
Bangalore	2	2000	No Limit	3200	60	53

Note: Ghaziabad and Haryana will not be able to avail the benefit as the state government norms will come in the way of constructing such dwelling units.
 
There is another bottleneck for implementation of such projects, i.e., promoting such high densities, may not be a situation where our infrastructure can cope up with it. It can be argued that in the wake of the quality of our infrastructure the overall limit must be increased to 60 meters for all towns and let the market forces decide the size in bigger towns and people in big or small towns do have to get a minimum quality of life.

2.      Developers also get the exemption of service tax on construction of houses up to 60 sq. m. under the Pradhan Mantri Awaas Yojna (PMAY) or housing schemes of the state government. Cost savings could be to the tune of 5.6%.
 
3.      The government has introduced tax benefits for additional interest exemption of ₹50,000 on home loans to be sanctioned in FY2017 for a first-time buyer of a unit worth below ₹50 lakhs and loan amount not more than ₹35 lakhs. This was one of the long standing demands of the industry; however it would have been better if 100% concession was granted to all interest and capital to build the first house, irrespective of the cost and the buyers are buying houses on their marginal income. Tax benefit on interest paid in such projects will be available for completion of a project in five years, instead of three years earlier. Deduction will be on interest payable on home loans or loans taken for construction of self-occupied houses. It is proposed that standard deduction of 30% shall be allowed against the amount received on account of unrealized rent while computing house property income.
 
4.      All those not owning a house and not getting HRA benefit from employer get INR 24,000 HRA support to compensate for the rent they pay. The current limit of HRA deduction has also been increased from INR 24,000 to INR 60,000. This will largely benefit partners of partnership firms.
 
5.      The time limit for acquisition or construction of a self-occupied house property for claiming interest deduction has been increased from three years to five years.
 
6.      The government has exempted the levy of dividend distribution tax to be paid by the SPVs to the trust (REIT). The distribution of dividends by the REITs is already a pass-through. This will increase the yield to investors in a REIT; however some of the challenges like LTCG benefit while transferring the property in a REIT and application of Stamp Duty still remain.
 
7.      In order to facilitate setting up of International Financial Centres (IFCs), companies located in IFCs shall not be liable to DDT and a MAT at 9% will be charged as against 18.5%.
 
8.      Modernization of land records program to be revamped under Digital India initiative of the central government. The Government has allocated INR 150 crores towards the initiative and will be implemented from 1st April 2016.
 
9.      The Model Shops and Establishments Bill to be circulated soon will give choice to shops to remain open on all seven days of the week providing fillip to the un-organised sector.
 
10.   Plan to revive 160 unserved and underserved airports and airstrips in partnership with the State Governments to enhance regional connectivity with estimated expenditure of INR 50-100 crores each. Additionally, 10 non-functional airstrips with AAI will also be developed. This is expected to improve connectivity to various small cities and town and can also improve economic prospects of the cities where these airports and airstrips are identified. 
 
11.    The SARFAESI Act, 2002 is to be amended to enable the sponsor of an Asset Re-Construction Company (ARC) to hold up to 100 per cent stake in an ARC and permit non-institutional investors to invest in securitization receipts.
 
Withdrawl of some concessions
Some of the other concessions are being withdrawn and a sunset date has been set for these concessions. These are
i) Section 10AA: A sunset date of March 31, 2020 under Sec 10AA for commencement of work in a SEZ for availing    deduction.
ii) Section 35AD: Deduction reduced from 150% to 100% in case of warehousing facility, affordable housing projects and building and operating hospitals from March 1, 2017.
iii) Section 80IA: No deduction to be made available to companies, which start development, operation and maintenance on or after April 1, 2017. But development, operation and maintenance of infrastructure facility on or after April 1, 2017 will be eligible for investment-liked deduction under Section 35 AD.
iv) Section 80IA: Removal of any deduction available for development of SEZs beginning April 1, 2017.
 
 Items that still need government action
While the budget did address some of the issues in real estate, it did not address some of the big ticket items for real estate. These are

• Ease of doing business - Multiplicity of agencies governing real estate continues. The budget is also silent on the implementation of the new company law.

• Implementation of GST - As we all are aware that upon implementation of GST, the logistics sector would have been the largest beneficiary along with real estate. This issue has been on the agenda of the government for a long time, but there are stiff challenges in implementing the same.

• No clarity on RERA and Land Acquisition bills

• Service tax on rent still continues

•  Real Estate was not given the infrastructure status which has been an industry demand for long.

Negative impacts of the budget

• The budget will also have a negative impact due to some of the provisions announced. These are Levy of tax on 60% PPF deposits – This has been the most criticized feature of the budget. This will lead to many   investors not giving money for  long term to the government and may lead to overall reduction on savings. Many senior citizens will also be impacted by this decision. The government may consider reversing this proposal.
• E- Commerce firms will be bought under the tax net and this may have some impact on the growth trajectory of these firms.
• Levy of 10% additional tax on dividend income received above 10 lakhs will certainly not go down well with the high net worth investors and also company and institutional investors.
• Increase in service tax, though marginal is still not welcome. The Government should in-fact reduce the Excise duty.

Over all the budget clearly favors provision of affordable housing and will improve the demand in the rural economy. If the government is able to control the Fiscal Deficit to 3.5%., then the foreign investors who have been out of the Indian markets, may consider investing back in India. But there is no denying the fact that there is still some pain that real estate markets will face for some more time to come. The Silver lining is that Real Estate is gaining the mind share of the government.