| Hello !
Welcome to The Estate Agents’ Association of India |
|
|
|
|
| News & Events |
3. |
1 March 2007 |
| |
Welcome to Program on Union budget 2007 - 2008 |
| |
Click here to view event photo gallery  |
| |
|
4. |
Budget Special |
| |
LETTING GO AN OPPORTUNITY |
| |
|
| |
While reams would have been written and lectures galore delivered analyzing the budget bill 2007-08, we shall in these columns restrict ourselves to those that affect directly or indirectly the real estate sector. Much could have been done by the Finance Minister. Some proposals are in fact pro-industry. But quite a few aspects have not been touched or have been ignored. Overall, the latter outweigh the benefits accruing from the few pro real estate proposals. The Government's ways are inexplicable. Despite the presence of a strong lobby, the industry has neither been able to represent itself in a manner convincing enough nor has it done much to improve its image.
The industry is perceived as a milky cow where various direct and indirect taxes can be levied with the full knowledge that these would be passed on to the property buyer. And now with rents on properties being used for commercial purposes shall be 'service taxed', even the lessor will not be spared. Of course, ultimately it is the lessee who will be left holding the bag. Lest the budget be described as gloomy for the sector, let us not forget the proposal on mortgage guarantees which, if executed right, will benefit all - the property owner, lender, financial institution, the developer and importantly, an investor in real estate. In these columns, we have dwelt on a few aspects of real estate and have used data from various sources. Overall, the feeling in the industry is that it was an opportunity that somehow got lost in the way. |
| |
|
| |
Taxation (India): |
| |
- Service Tax on Rental income from properties used for commerce and commercial office purposes
- Mortgage insurance (India): Mortgage move to help lenders, borrowers
- Financial capital (Mumbai): Finance hub plan kicks off
- Cement (India): Differential excise on cement
- Tax Holiday (National Capital Territory): Five Year Tax holiday for hotels
|
| |
|
| |
Mortgage move to help lenders, borrowers |
| |
Housing loans: A positive step for lenders, as they will be able to recover dues in a better way and the move will also help reduce bad loans.
The measures: The government proposes to create a regulatory framework for setting up mortgage guarantee companies, for provision of insurance cover to home loan companies.
The context: The domestic home loans market has been growing at a breathtaking pace over the last couple of years. And with the growth, banks have also been facing higher levels of bad loans. Mortgage guarantee is a critical component in a residential mortgage financing. It protects mortgage lenders from credit losses and also helps individuals to buy homes with low down payments.
The impact: Apart from helping lenders and borrowers, mortgage insurance companies are expected to greatly benefit the largely neglected section of borrowers - self-employed people, unorganised sector workers and the poor. Currently, self-employed and unorganised sector workers are required to borrow at high interest rates. The finance minister said, "Our people want housing loans. Banks and housing finance companies that lend against mortgages would have greater comfort if the mortgage can be guaranteed through a three-way contract between the borrower, the lender and the guarantor." Housing finance players have welcomed the move saying it will enable them to penetrate further and also profile the borrower - identify people with a terrible credit history and a series of defaults. So if there is a backing, segments such as self-employed people, unorganised sector workers and the poor will benefit as the lender will be protected against default. "The move is in the interest of both the lender and the borrower," said an official of a housing finance company.
S K Mitter, managing director of LIC Housing Finance Company, said, "It's a positive step. Banks and housing finance companies will have comfort, as we will be able to recover our dues in a good way and the move will also help reduce our non-performing assets." Mortgage guarantee companies can also enable mortgage lenders avail of pool insurance for lending to the poorer section of the society. Mortgage insurance originated in the US to help purchase of homes at a low down payment, with the baby boom of the 1950s when every citizen wanted to own a home.
|
| |
|
| |
Finance hub plan kicks off |
| |
Mumbai is on way to becoming a world-class financial centre. The Percy Mistry committee on making Mumbai a Regional Financial Centre will soon come in the public domain for feedback and further action. Finance Minister P Chidambaram gave an indication to this effect in the Union Budget, raising hopes that the commercial capital of the country will get a makeover. India Inc is eagerly waiting for the report. "A welcome thrust of the Budget is the proposed decision to work on making Mumbai a Regional Financial Centre. The Chamber particularly welcomes this proposal because it has been its most significant recommendation to the government for the last many years," said Nayan Patel, president, Indian Merchants Chamber (IMC).
According to a senior banking source, the panel has recommended a host of far-reaching proposals that will catapult Mumbai to the status of cities like New York and London by year 2020 - like, full capital account convertibility of the rupee, creation of currency spot and derivatives market, permission for wholesale asset management business, entry of industrial groups to the entire financial sector, mergers and acquisitions across the financial markets and bringing organised financial trading under Sebi. If implemented, Mumbai will see the entry of more foreign players and funds. |
| |
|
| |
Differential excise on cement |
| |
Cement currently attracts an excise of Rs 408/tonne. The Budget has introduced a differential duty structure. The duty will be Rs 600 a tonne when retail price is above Rs 190/bag and Rs 350/tonne when the price is Rs 190/bag or lower.
The Finance Minister's proposed differential duty structure on cement to rein in prices of the commodity may backfire as cement prices are likely to go up by at least Rs 11.82 per bag with immediate effect. Since the duty is being charged on the retail price, manufacturers are looking to pass on the burden of increased excise duty to the end consumer. Excise duty on cement, now at Rs 408 per tone, irrespective of the retail price of the commodity, may rise up to Rs 612 per tone if the retail price exceeds Rs 190 per bag. The duty may be lowered to Rs 350 per tone if the maximum retail price is Rs 190 per bag or lower, as per the Union Budget proposal. Cement prices are currently hovering around Rs 200-250 per bag, on an average, across the country. They have risen 50% in the past 18 months. An upward revision in cement prices will hit the construction sector the hardest as cement constitutes 13-20 % of the input cost in various construction projects.
Cost of infrastructure, road and housing projects will go up with an increase in cement prices. In the current market situation, where cement demand is fairly price-inelastic, industry players can afford to pass on the entire burden of increased excise to consumers. But cement companies are unhappy with the differential duty structure, as it is the only sector singled out for price control. Industry players feel that the premise on which the price control is based is flawed as cement prices have gone up only 6% on a compounded annual growth rate basis in the past 10 years and the cement sector's contribution to the overall inflation in the economy is negligible. The government's attempts to control prices may act as a disincentive to the capacity-strapped sector.
The cement industry has been faced with a supply constraint, as the current capacity at 155 million tones has proved insufficient to meet rising demand from the infrastructure and housing sectors. Large-scale expansions have been planned in the sector to increase capacity by another 60 million tonnes in the next two-three years. Industry experts predict that the sector will require an additional 90-100 million tonnes in the next five years to meet demand, which is growing at 10% per annum. |
| |
|
| |
Five year tax holiday for hotels |
| |
The announcement of the Finance Minister, Mr. P. Chidambaram, to not only provide a five-year tax holiday for two-, three- and four-star hotels but also conventions centre seating a minimum of 3,000 people in and around Delhi, has been welcomed by real estate developers and major hotel chains. Presenting the Union Budget 2007-08, the Finance Minister said that the proposed five-year holiday from income tax was being given to boost infrastructure development in Delhi and the surrounding areas ahead of the 2010 Commonwealth Games. "The projects should be completed and begin operations in the National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Buddha Nagar during the period April 1, 2007 to March 31, 2010," Mr. Chidambaram announced.
Welcoming the announcement, the Chief Executive Officer of Choice Hotels, Mr. Vilas Pawar, said it would encourage entrepreneurs and real estate owners to invest in mid-market hotels. "This would take care of the demand-supply imbalance and result in additional supply of rooms, which in turn would help level the rising hotel room rates," Mr. Pawar said. The Executive Vice President of Carlson Hospitality, Asia-Pacific, Mr. K.B. Kachru, said that the Group would have a re-look at its strategy and look at further development of some brands.
|
| |
|
| |
MONTH'S SPECIAL FEATURE
Service tax on rent from commercial properties |
| |
According to the present budget proposal, service tax will be levied on the rent received from the leasing of commercial properties @ 12.36%. Commercial property includes premises that are used for a commercial or business purpose. Commercial property will thus include offices, shops, business centre malls, cold storages, warehouses. Industries across the board will be affected by the levy. Most of the mall space is rented and so retailers located here will feel the pinch. It is estimated that margins in the retail sector will go down by 1% because of the tax. Another major sector to be hit hard is the BPO. Most BPOs prefer to rent premises, mainly to enable a quick exit. A third segment will be the logistics industry. Taxing this sector will have a multiplier effect.
Commercial space is scarce today. Cost of real estate has shot up in the past three years and rentals today are reflecting this cost. When a whopping 12.36% tax is added on the already high rent, there's no way costs are going to be absorbed by the lessee. It is anybody's guess whether the end consumer will readily accept the passed-on cost or simply reduce consumption. In the case of retail, where margins are low and the volume game is played, the ever-friendly neighbourhood store with its own premises may well beat the malls at their game. A retrograde step is the unanimous opinion of the industry. |
| |
|
| |
OTHER BUDGET HIGHLIGHTS |
| |
-
Tax holiday under Section 80 IB not mentioned at all
-
Modified VAT applicable to developers
-
MAT extended to IT companies
-
Textile park allocation raised from Rs. 189 crore to Rs. 425 crore
-
Tax exemptions on interest paid on home loans to continue
-
Surplus forex reserved to be deployed in infrastructure financing schemes by establishment of two
-
holly owned overseas subsidiaries of IIFCL.
|
| |
|
| |
Q&A |
| |
Q :
Which is the world's largest airport terminal?
Answer to Q: The Hong Kong International Airport passenger terminal building is 1.3 km (0.8 miles) long and covers an area of 550,000 sq. m (135.9 acres) and is the world's largest single airport building. It also has 48 aircraft parking stands with boarding gates and air bridges; the terminal has a capacity of 45 million passengers a year, arriving on 460 flights every day.
|
| |
|
| |
DO YOU KNOW?
REVERSE MORTGAGE |
| |
The Finance Minister in his 2007-08 budget speech announced the National Housing Bank will introduce a reverse mortgage scheme tailored for senior citizens. Reverse mortgage is offered by a handful of financial institutions. But this is the first time a guarantee will be tagged to the mortgage. The National Housing Bank (NHB) will offer guarantees to senior citizens who avail of the facility from other financial institutions. What NHB will do is offer guarantees to these senior citizens that will protect them against default by financial institutions and banks. NHB will stand surety for the obligations of these institutions to make regular payments.
The guarantee will be a great relief to senior citizens. Hitherto, the citizen had to mortgage his/her house upfront and then avail of regular payments. There was always a nagging feeling of uneasiness at the thought of the institution not making regular payments. The prospect of litigation does not appeal to such citizens who are looking at a peaceful and hassle-free life. The decision to provide guarantees came up when several senior citizens' organizations raised concern over a possible default.
The market for reverse mortgage is estimated at Rs. 5,000 crores. Citizens need to be 62 or above to become eligible for the scheme. NHB has plans to refinance banks and institutions to extend reverse mortgage loans.
Reverse mortgage is a facility by which a senior citizen mortgages the house and gets a regular monthly payment for a specified period, say 15 years. At the end of this period, he repays the principal amount received along with the accrued interest and gets the mortgage released. He also has the option of not repaying. In which case the lender sells the flat on the owner's behalf, adjusts the principle and interest and thereafter pays the borrower the balance if any.
NHB is ready with the draft operational guidelines and regulatory framework |
| |
|
| |
Disclaimer: No warranty or representation, expressed or implied, is made to the information contained herein, and same is submitted subject to errors & omissions. Neither the whole nor any part of this newsletter may be included in any published document without the written approval of The Estate Agents’ Association of India. |
|
| |
|
|
|
Copyright © 2007 The Estate Agents’ Association of India. All rights reserved.
308, Gundecha Chambers, 3rd floor, Nagindas Master Road, Fort. Mumbai - 400 023 |
|
