The Budget Ritual

The annual ritual of sitting in front of television screens whilst the Finance Minister rolls out his plan for the year ahead was met with less enthusiasm this year. In any case, it got over even before one could say Jack Robinson. Perhaps everyone is still coming out of the after-of demonetisation. Here’s quick overview of what it means for the real estate sector. It is hard to say whether residential property as an investment tool has got an uplift or a browbeating.On the sunny side, the period of holding property has been reduced from three to two years. Investors in realty will be able to liquidate their investments earlier. Their sales shall be taxed aslong term capital gains at 20% with the benefit of indexation.The base year for indexation is proposed to be shifted from April 1, 1981 to April 1, 2001. The number of financial instruments in which the capital gains can be parked and exemption claimed shall be enlarged. A move aimed at adding buoyancy to the ailing market. On the down side, as far as second homes are concerned, home buyers shall not be able to set-off the entire interest payment on their home loans. A cap of Rs.2,00,000/- has been introduced. Typically, second homes are bought on loans, rented out and the difference between rentals and interest on the loans set-off as losses against salary or other sources of income. This encouraged purchases in residential real estate. There is also a palliative here; second home buyers shall be entitled to carry forward the remaining losses for eight subsequent years. In 2018, when all this is history, time alone shall tell whether the reduction in the period of holding was a winner or the Rs.2,00,000/- ceiling a dampener. One of the biggest gifts comes from according the infrastructure status to affordable housing. This translates into a number of advantages. Finance for such projects shall be easily forthcoming. Under Section 80 IBA of the Income Tax Act, developers of such projects enjoy a 100% tax holiday subject to the stipulated conditions. These conditions have been relaxed. In order to qualify as affordable housing, the area of residential units was limited to 30sqm in the metropolitan cities and 60sqm otherwise, in terms of built-up area. This parameter has shifted from built-up area to carpet area. Thus, larger flats too shall now be eligible. Moreover, the duration for completion of such housing projects has been loosened from three years to five. The pluses and minuses apart, the real threat comes from the sweeping powers that have been granted to the taxation authorities. Junior officers can conduct enquiries in cases where no proceeding is pending. The income tax authority need not disclose “reason to believe” to initiate a search. Properties can be provisionally attached. Tighter controls have been cast on non-governmental organisations and charities, not to mentionGeneral Anti Avoidance Rules (GAAR),which have also been introduced. There is no doubt that a country of over a billion cannot run if only 1% of the population pays income tax. The evaders must be brought to book. However, unbridled authority must not lead to vigilantism. A system of checks and balances must ensure that even the Praetorian Guards do not falter. Based chiefly on regulatory certainty, the World Bank annually ranks around 190 countries according to ease of doing business in their economies. India ranks 130^th; China 78^th; and Brazil 123^rd. Indiahovers above the list of Sub-Saharan African countries, failed democracies, economies struggling from coups. Not a happy situation. Moreover, improvement in the Sub-Saharan African region was almost three times as high as the average improvement in the OECD countries. Therefore, we really need to spruce up our act. The issue is not merely that of compliance, but certainty. Property titles are challenged eons after the title has passed. Court battles linger on till kingdom come. And now it should not be the case that law-abiding citizens find that there is the taxman breathing down their necks. Lord Acton’sfamous words may sound out a good note of caution: “Power tends to corrupt, and absolute power corrupts absolutely”. Divya Malcolm divya@mumbai.kochhar.com Principal Associate Kochhar& Co. The view expressed are her own and not that of the firm.