Finance (no 2) bill 2014 amendments in real estate (part i) by saketsingh

Finance (No. 2) Bill 2014: Amendments in Real Estate (Part I) The Finance (2) Bill 2014 contains may of amendments to the Income-tax Act, 1961 specially with reference to the Real Estate Sector. The Finance Minister has proposed hundred new cities and urban development through the concept of Public Private Partnership. It is expected that this type of announcement by the Finance Minister will make a big turnaround for the Real Estate Sector and one can expect to see big development of the Real Estate Sector all around in whole of India. The following are the main amendments relating to real estate sector :New Taxation Regime for Real Estate Investment Trust ((REIT) For the first time clear cut provisions have been mentioned in the Finance Bill to provide for complete new taxation regime for Real Estate Investment Trust (REIT). Similar provisions would also be applicable for Infrastructure Investment Trust (INVIT). To achieve the objective of Real Estate Investment Trust to its fullest extent a new terminology “Business Trust” has been presented in the budget. Section 2(13A) of the new proposed section defines “Business Trust” which means a Trust registered means a trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust, the units of which are required to be listed on a recognised stock exchange, in accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and notified by the Central Government in this behalf. It may be noted here that the Securities and Exchange Board of India had proposed vast regulations relating to two new categories of investment vehicle namely the Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (INVIT). These regulations were also placed in the public domain long back and the final regulation will be notified by SEBI in a short time. However, taking advantage of the Finance Bill the Finance Minister has come out with clear cut taxation aspect relating to income-investment model of such REIT and INVIT which are being defined as Business Trust. The following are distinctive elements of this new theme of Business Trust :(i) the trust would raise capital by way of issue of units (to be listed on a recognised stock exchange) and can also raise debts directly both from resident as well as non-resident investors; (ii) the income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor. The Government has appreciated that taxation aspects of this Business Trust needs to be defined properly so that there is no ambiguity at a later stage. Hence, the Finance No. (2) Bill 2014 has proposed to amend the Income-tax Act to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be

taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. Such regime has the following main features: (i) The listed units of a business trust, when traded on a recognised stock exchange, would attract same levy ofsecurities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long term capital gains, would be exempt and short term capital gains would be taxable at the rate of 15%. (ii) In case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal. Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of shares shall also be included in the holding period of such units (iii) The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV. However, withholding tax at the rate of 5 per cent. in case of payment of interest component of income distributed to non-resident unit holders, at the rate of 10 per cent. in respect of payment of interest component of distributed income to a resident unit holder shall be effected by the trust. (iv) In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 per cent. tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided insection194LC of the Act. (v) The dividend received by the trust shall be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt. (vi) The income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. Any other income of the trust shall be taxable at the maximum marginal rate. (vii) The business trust is required to furnish its return of income. (viii) The necessary forms to be filed and other reporting requirements to be met by the trust shall be prescribed to implement the above scheme. It is expected that in due course the Government will come up to describe reporting requirement and other details etc. The setting up of REIT through the process of Business Trust and getting it recognized and listed by a Stock Exchange, it appears can be a real great idea for all those who are connected with the Real Estate Sector. Higher Interest Deduction on Self Occupied Residential Property Presently individuals and Hindu Undivided Families are entitled to deduction up to a maximum of Rs. 1,50,000 on account of interest on housing loan for self occupied house property. The Finance (2) Bill 2014 has proposed to amend section 24 of the Income-tax Act 1961 and to provide for deduction up to Rs. 2,00,000 in respect of interest on housing loan. The special feature of the new proposed amendment is that this benefit will be available to existing tax payers and will also be equally available to new investors who make investment in purchase of a residential house property by taking a loan. It may also be noted here that the loan can be taken from bank, other financial institutions or from any other person.

Capital Gains Exemption on Investment in specified bonds namely Capital Gain Bonds Section 54 EC of the Income-tax Act 1961 provides for exemption on Capital Gain if persons were to make investment in Capital Gain Bonds namely the Bonds of REC or NHAI. The maximum limit up to which one can make investment in this Bond is Rs. 50 lakhs and that the investment has to be made by the assessee within a period of six months from the date of sale of capital asset. The section specifically states that the investment made in the long time specified asset during any financial year shall not exceed Rs. 50 lakhs. However, the wordings of the proviso have created an ambiguity. As a result the capital gains arising during the year after the month of September were invested in the specified asset in such a manner so as to split the investment in two years i.e., one within the year and second in the next year but before the expiry of six months. This resulted in the claim for relief of one crore rupees as against the intended limit for relief of fifty lakh rupees. Accordingly, it is proposed to insert a proviso in sub-section (1) so as to provide that the investment made by an assessee in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees. Thus, the impact of this new amendment is that tax payers cannot make investment for saving Capital Gain of a sum of Rs. 50 lakhs in one financial year and another set of Rs. 50 lakhs coming in the subsequent financial year. Hence, maximum of Rs. 50 lakhs alone will be the amount that will be allowed as a deduction in terms of section 54EC for investment made in the long term specified asset which are sold during any financial year. Investment in Foreign Residential Property not allowed for Saving Capital Gain Tax Section 54 as well as section 54F specifically provide for making investment in a residential house property which can result into saving of Capital Gain. However, till recently the law was silent with regard to the location at which this new residential house property can be purchased or built so as to save Capital Gains Tax. It is well known fact that in last one year itself a large number of tax payers from India have sold their Real Estate residential property in India and have invested in buying another residential property in London. Similarly, tax payers have also sold their capital assets in India and have invested in residential properties in USA, Singapore, Dubai and many other places. The question now arises is whether the investment in residential property outside India would be eligible for tax benefit within the framework of the provisions contained in the Income-tax Act, 1961. A deep close look at the provisions contained in section 54 and section 54F do not put any restriction for making the investment in the residential house property in any part of the world. However, both these sections have been proposed to be amended by the Finance (2) Bill 2014 whereby Capital Gains exemption in case of investment in a residential house property will be available only when the investment is made in one residential house situated in India. Hence, it is very clear cut now that if you sell some property in India, you cannot make investment in another residential property outside India. Similarly, it is also crystal clear now that the investment has to be made only in one residential house. As a result of this new proposed amendment which is applicable from the Financial Year 2014-15, it is time now for those who are thinking of making investment in residential property outside India to scrap their plan or to face the problem of Capital Gain.

Amount Forfeited liable to Income-tax It is seen in Real Estate transactions that many time certain amounts are advanced by prospective buyer but later on the amount is forfeited due to non keeping of the commitment specially with regard to the time factor etc. etc. The amount received by a person by way of forfeiture of the amount is not taxed and has been treated as a capital receipt and not a revenue receipt. However, the budget 2014 provides for an amendment of section 56 and now it is clearly stated in the proposed amendment that any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,–– (a) such sum is forfeited; and (b) the negotiations do not result in transfer of such capital asset would be treated as income from other sources as per section 56 of the Income-tax Act, 1961.

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