Budget 2014: 5 changes to improve housing and real estate sector

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Jul 4, 2014, 02.26PM IST

By Neeraj Bansal

The real estate sector has been the backbone of the Indian economy and has been a major contributor in the economic growth. The approach followed by real estate players have been instrumental in changing the face of the country, from being under-developed to accelerating its way to a developed country. The sector contributes about 6.3 percent to the nation's GDP (2012-13) is a major source of revenue for Central, state and local governments and provides employment to more than 50 million people (along-with construction sector). It also supports about 300 ancillary industries, such as cement, steel, building material, paint and transport.

Since the opening up of the Indian economy to foreign investors in 2005, the sector has attracted more than US$22 billion through foreign direct investment; it is expected to attract US$180 billion by 2020. However, over the past few years, it has been facing several problems, such as increased land prices — the most precious and scare 'raw material' — funding constraints, slump in sales, numerous approvals and a significant time required to obtain them, and uncertainties on the tax and regulatory fronts.

However, there's no denying that the sector has substantial growth potential, which is evident from a burgeoning middle class, significant high urbanization, shortage of affordable housing, proposed development of new cities and industrial corridors, signs of revival in the global economy and the corresponding positive impact on the Indian economy. The need of the hour is for the government to reform its policies for the sector and tax regulations to provide the much-desired fillip to the sector. Here are some changes that can be brought in the budget to initiate the process:

1. Service tax credit on construction activity is not available against output service tax liability on renting immovable property. Credit of input service tax paid on construction service should be allowed to avoid cascading effect of taxes.

2. Clarification on transferring of development rights: The transferring of 'development rights' entails transferring of rights related to land. Some states levy stamp duty on such transactions. Taxing the transferring of development rights has not been clarified under the current service tax regime. Suitable clarification should be issued to ensure that the transferring of development rights would not attract service tax.

3. Industry Status for Affordable Housing: The Reserve Bank of India characterizes the sector as 'risky', which deters it from accessing funds. Considering that it generates significant employment opportunities and contributes to the GDP, the sector should be given an industry status, which will help it access bank funding at better interest rates and reduced collateral values. A reduction in the base rate and repo rate would enable banks to grant loans to developers and home buyers at reduced rates, which would increase affordability.

4. Revoke the LARR Act 2013; make only landowner's consent mandatory: mandates obtaining consent from 70 per cent of project affected families (PAF) in case of public private partnership (PPP) projects and 80 per cent in case of public projects. PAF is defined to include not only land owners but also those who lose livelihood from the land acquired. Hence, the requirement of obtaining consent of 70/80 percent PAF can be a tedious and long-drawn-out process. These provisions should, therefore, be modified to include only landowners.

Alternatively, the PAF consent limit should be reduced. Also, compensation of up to two times of the market value in urban areas and up to four times of in rural areas seems steep, considering the fact that PAF are also provided separate rehabilitation and resettlement (R&R) benefits.

  5. From the perspective of Real Estate Regulatory Agency (RERA), the requirement of setting aside up to 70 per cent (state-wise threshold) of the sale proceeds in an escrow account appears to be high, considering that the cost of the land is generally between 40 and 60 per cent, depending on the state in which it is located.

Accordingly, it is suggested that the upper limit of 70 percent be reduced or states should be directed to issue guidelines to fix an appropriate cap so that the money in the escrow account is enough to meet the construction cost of a project but does not unnecessarily lock additional liquidity of developers.
The continued growth driven strategies of the real estate players, along with the support of the Central and State governments, will surely pave a positive path to take the Indian economy to the next level.

The author is a Partner at KPMG in India.

REFILE-FSB to back London forex fix, recommend detailed changes -sources

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(Adds dropped word "forex" to headline)

By Patrick Graham

LONDON, July 8 (Reuters) - The world's top financial regulator is set to issue a consultation paper to banks making detailed proposals for changes to the way foreign exchange "fixings" are conducted, banking sources said on Tuesday.

The sources said banks expect the Financial Stability Board (FSB) to back the existing system of fixings but go into more detail than previously thought on potential changes to reduce the risk of market manipulation.

The FSB is due to report to the Group of 20 major economies later this year on reform of a range of financial market benchmarks and the first fruits of that have been expected for some time.

Senior players in the foreign exchange markets had thought it was likely to take a cautious approach on the currency fixings, preferring to wait for the conclusion of around a dozen regulatory investigations worldwide.

But two sources with knowledge of discussions with the FSB told Reuters that UK-based bankers and officials, concerned at the effect the row has had on markets which are central to London's role as a financial centre, had exerted pressure for faster moves to draw a line under the row.

While a number of different electronic and algorithmic alternatives to the existing fixes have been discussed, the sources said there was no appetite to turn away wholesale from the existing benchmarks.

"It has become clear that clients want the fix to remain and at this stage there will be no drastic changes to how it is calculated," one source told Reuters.

"But there will be measures to reduce manipulation. Most of the banks are providing some sort of input into this conversation. The next stage is they will come out with some sort of consultation paper. There certainly will be measures to reduce abuse within that."

Britain's Financial Conduct Authority and the U.S. Department of Justice opened investigations last year into allegations that senior traders shared market-sensitive information relevant for the London fix, which is set at 4 p.m. London time, using actual trades.

London is the hub of the global currency market, accounting for some 40 percent of the $5.3 trillion traded on an average day.

The WM/Reuters fix relates to exchange rates including the euro, sterling, Swiss franc and yen and are compiled using data from Thomson Reuters and other providers. They are calculated by WM, a unit of State Street Corp. Thomson Reuters is the parent company of Reuters News, which is not involved in the fixing process.

The FSB declined to make any comment.

QUARANTINE

While there have been anecdotal indications of a dip in volumes of trade around the 4 p.m. fix, bankers and asset managers say that overall the fund management industry has continued to use it.

They say asset managers are more concerned with wanting to ensure that their currency trades are done at a rate identical to the one by which their daily assets are valued. If rates differ, they can register a loss or a gain that then has to be explained to their clients.

"Some investors may reconsider their trading strategy. However, many are still concerned with tracking error and are still going to trade at the WM," said Klaus Paesler, head of currency and overlay strategy at Russell Investments in London.

"It seems the situation is at a bit of an impasse. Asset managers may want to trade away from the fix, but in many cases are benchmark sensitive so need to keep executing at the fix to reduce tracking error."

One source said the FSB could make a number of detailed proposals on changes to the mechanics of how fixing orders are lodged and dealt with to head off the potential for abuse.

As recently as a month ago, officials at a number of financial sector bodies were saying the FSB's planned preliminary report this summer would make only general observations about the need for unified codes of conduct and for benchmarks to be set in liquid markets.

The sources said on Tuesday that the consultation document was still being written, and that details of the changes it will propose to how orders are dealt with are still in flux.

But they pointed to discussions among some of the forex industry's major players over methods by which orders could be lodged direct by clients with third parties - either a fixing matching system like that unveiled recently by brokers EBS or a custodial bank.

That would give the market a process by which it would be impossible or at least difficult for the speculative community - essentially banks' spot desks, hedge funds and the major asset managers - to get hold of pooled fixing order information. (Editing by Catherine Evans)