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Budget 2012-13: Infrastructure and Real Estate Overview By BMR Advisors

  • BMR Advisors has come out with its report on Infrastructure and Real Estate sector.

  • Infrastructure - Overview

  • Realising that lack of adequate infrastructure is a major constraint on growth, Budget 2012 continues to give the necessary thrust to the infrastructure sector. In the Twelfth Plan period, investment in infrastructure is expected to go up to INR 50,000 billion, with half of this coming from private investment. Introduction of "negative list" based taxation for services and increase in service tax and median excise duty rates from 10 percent to 12 percent are significant tax proposals in the Budget. There is no concrete date given for implementation of GST, while the commitment for expeditious implementation of DTC after factoring the House Panel's report was reiterated.

  • Policy announcements

  • Commitment to encourage private public partnerships ("PPPs") in the infrastructure sector continues with upto INR 25,000 billion in the twelfth plan period expected to come from the private sector. Under the scheme for support to PPPs, viability gap funding extended to infrastructure sector, including irrigation (including dams, channels and embankments), terminal markets, common infrastructure in agricultural market, etc.

  • Proposal to double the amount raised through tax free bonds for financing infrastructure projects to INR 600 billion (out of which INR 100 billion allocated towards NHAI, IRFC and IIFCL each).

  • To remove ambiguity in policy and regulatory domain and encourage investments, harmonized master list of infrastructure sector to be notified.

  • In order to ease access to infrastructure projects, IIFCL has put in place a credit enhancement and take-out finance. A consortium has also been put in place by IIFCL for direct lending and grant of in-principle approval to developers before submission of bid for PPP projects.

  • External Commercial Borrowings ("ECB") allowed for meeting capital expenditure on maintenance and operations of toll systems for roads and highways.

  • In order to provide respite to the ailing Indian civil aviation sector, following has been proposed:

  • Direct import of aviation turbine fuel by the Indian civil aviation sector allowed;

  • ECB to meet working capital requirement permitted for one year subject to a total ceiling of USD 1 billion; and

  • Proposal to allow investment by foreign airlines up to 49 percent under consideration.

  • For inclusive development, allocation to Rural Infrastructure Development Fund ("RIDF") increased to INR 200 billion. In addition, INR 50 billion has been allocated exclusively for creating warehousing facilities under RIDF.

  • Defence PSUs allowed to form JVs under PPP mode - this will enable in achieving substantive self-reliance in the Defence sector and production of state-of-the-art Defence equipment.

  • Real Estate - Overview

  • Taking forward policy reform in real estate sector, the Budget proposes to permit ECB for low cost affordable housing projects, continuing the interest subvention scheme of 1 percent (announced in Budget 2011) and enhancing provisions under Rural Housing Fund from INR 30 billion to INR 40 billion. The Budget also proposes setting up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans.

  • On the direct tax front, the key change is the introduction of withholding tax provisions for immoveable property transactions. On the indirect tax side, introduction of a "negative list" for taxing services and increasing the service tax and mean excise duty rates from 10 percent to 12 percent are the significant changes.

  • Direct Tax Proposals

  • Definition of Venture Capital Undertaking ("VCU") has been aligned with the SEBI definition, thus including real estate within the permitted sectors for venture Capital Funds ("VCF") or Venture Capital Companies ("VCC") to invest in and yet obtain the pass through status.

  • Withholding tax provisions have been extended to cover transfer of certain immovable properties other than agricultural land. In case of a transfer of an immovable property, the transferee shall be required to withhold tax at the rate of 1 percent on the consideration paid in excess of INR 5 million in case of properties situated in urban agglomeration or INR 2 million in case of any other area. Further, in order to ensure compliance, an additional condition has been inserted to furnish the proof of deduction and payment of withholding tax at the time of registering the property as per the Indian Registration Act.

  • A new proposal has been introduced which exempts capital gains tax on sale of residential property, if sale consideration is used for subscription in equity shares of Company which is a MSME enterprise, and such enterprise purchases plant and machinery.

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