Fresh real estate sops to spur revival . Assetventures

Eyeing fresh signs of a revival in the economy, which should nudge growth back to 9% level by end-2010, finance minister Pranab Mukherjee announced fresh tax giveaways for housing and renewed the government’s commitment to more economic reforms and introduction of a single goods and services tax (GST) by 1 April.

The move, expected to further boost housing demand in the economy especially in tier II cities, also seeks to quell growing criticism that the Congress-led United Progressive Alliance (UPA) is averse to second-generation reforms.

Replying to the debate on the Finance Bill, which was approved by a voice vote by the Lok Sabha, Mukherjee renewed his efforts to strike political consensus on key areas of tax reform, including the introduction of a direct tax code.

The reply also calibrated a few of his 6 July Budget tax proposals, which are not expected to result in big revenue giveaways, thereby precluding the possibility of a marked increase in the Rs4 trillion fiscal deficit forecast for 2009-10.

The stand out feature of Mukherjee’s calibration of tax proposals in the Finance Bill was the emphasis on boosting real estate through both budgetary support and tax changes. The budgetary support in the form of a 1% subsidy on the interest rates paid by people with a home loan of up to Rs10 lakh would cost the exchequer Rs1,000 crore in the current fiscal year, Mukherjee said.

Under Section 80 IB (10), income-tax deduction was given to real estate developers for housing projects approved before 31 March 2007. This has now been extended to projects approved between 1 April 2007 and 31 March 2008, provided these projects are completed on or before 31 March 2012.

“We have been asking for an extension for a long time and I am happy that this step has been taken,” said Kumar Gera, chairman of the Confederation of Real Estate Developers’ Association of India. “The extension will benefit only those projects that were approved during this period, so it may not have an impact on all housing projects in all markets. It could have an impact on certain micromarkets.”

Among other key tax changes were the removal of service tax charged by contractors repairing and maintaining roads, and extending tax benefits given in the Budget to firms producing natural gas under the new exploration licensing policy to those producing natural gas from coal-bed methane blocks.

The finance minister admitted he had to ignore many other post-Budget representations, which came his way, as the tax proposals had to mesh with the broad strategy of providing fiscal stimulus. “We must generate internal demand,” he said.

The spillover of the fiscal stimulus provided last fiscal year and proposals introduced in the 6 July Budget have cost the exchequer Rs2.4 trillion, Mukherjee said. The fiscal deficit (extent of borrowings needed to bridge the gap between expenditure and revenue) is estimated to touch 6.8% of the gross domestic product in 2009-10.

The Budget estimates of the Centre’s net tax revenue in 2009-10 is Rs4.74 trillion, an increase of 0.19% over the previous year’s revised estimate.

Economic growth, which received top priority in the Budget’s overall strategy, is showing signs of recovery, Mukherjee said, though he remained cautious about signals provided by an improvement in economic indicators such as May’s factory output. “I would not say we are out of it. Situation is still difficult.”

Mukherjee assured the House that the government would continue putting in place reforms, including tax reforms, to facilitate growth.

In the area of tax reforms, Mukherjee said he was confident India’s indirect tax system could stick to the 1 April deadline for transition to GST, even though some states such as Madhya Pradesh and Tamil Nadu have said the deadline might be premature.

“On broad national interest, there is no discordant view,” Mukherjee said, explaining why he remained upbeat about meeting the deadline.

GST is India’s most ambitious indirect tax reform, which seeks to dismantle tax barriers that fragment India’s market according to state boundaries. The transition requires cooperation between Centre and individual states.

The country’s tax reforms could, however, be negatively affected by the Opposition’s displeasure with the way the UPA has directed policy in areas such as international affairs.

“A mere call for consensus is not enough. To have consensus on issues, the government should pre-consult the Opposition on issues of national importance. Unfortunately, the (government’s) conduct in the last two months does not reflect this,” said Prakash Javadekar, spokesperson of the Bharatiya Janata Party.