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Current Scenario of the Real Estate Sector: A Perspective

by InCorp Advisory

Reading Time: 7 minutes

The real estate sector in India has been facing a tough time from quite a few years. The situation has become tougher due to the current Covid-19 situation across the globe. The uncertainty holds the world to a standstill and India is not an exception to it

The global economic slowdown is likely to negatively impact real estate demand in the country this year. Almost all sectors have started the first month of their financial year 20-21 with minimal or negligible sales.

It is currently too early to provide a detailed, quantitative assessment of the COVID-19 impact on economic activity, industries, and the real estate market. The effects of the outbreak will inevitably vary from market-to-market, and the true impact and recovery will manifest in forthcoming quarters.

We at Incorp received a lot of queries coming in the past few weeks from our contact sphere to help them understand the impact on Real Estate; thereby our team has tried to address some of the top points impacting the Industry and the ways to mitigate it.

  • We have often heard of the statement – “Communication is the key to success”. In this pandemic situation, the word communication gets replaced with Compromise. “Compromise is the key to success” – Developers will have to follow only one strategy “Compromise”. Compromise in their lifestyle, spending, sales price expectations, holding unsold inventories, and all those things coming their way. The interest meter keeps running even when one is sleeping. Line of credit sanctioned by banks, financial institutions, NBFC’s, etc. before lockdown will no longer stay in the same state of condition. Every loan sanctioned will be reviewed and valuation will be challenged post lockdown. Mr. Deepak Parekh, HDFC warned developers against high leverage and said it is going to work as a double-edged sword. “In good times, it amplifies your profit. In bad times, it destroys you. Be careful of the perils of leverage,” he further added.
  • Holding on readily available inventory by the developers will no longer be in the interest of the developer. Developers may have to take a haircut on their sale price expectation up to 20%. This will help to generate liquidity and to sustain in this market in the long run. Also, the launching of new real estate projects is not feasible. Smaller the house, easier to sell. Demand for affordable housing and homes with the ticket size of up to Rs. 2 Crores will still exist, but the high-end segment already has saturation. Maintaining liquidity in the current situation will be a challenge due to the ongoing outflows and commitments but once life comes to normalcy, one should start maintaining liquidity. 
  • Equity partners shall be welcomed with open arms. This includes working in Joint Venture Model, Development Manager Model, strategic partnerships and financial partnerships. Instead of further borrowing, the developer shall explore PE funds, HNIs, strategic partner who has a strong face value in the market. Being partnered with the strong face or goodwill may, in turn, help the developer to sail through from this situation. Even partnering in with well-esteemed contractors will be equally useful. 
  • Our Debt syndication experience tells us that developer has a tendency to switch the banks quite often. This is mainly because of two reasons;
    a. An existing bank may not extend the support in the aggressive expansion of the developer/borrower &
    b. Competency in the commercials offered compared to existing banks.

Though the former reason is explicitly the call of the bank depending on their appetite and risks involved but later are in hands of the developer. In either case, the developer shall stick to its existing bankers and encash their long-lasting relationships with the banks. Banks are to be treated as co-owners in the project. A borrower should not switch the banks for 50 to 100 bps point difference.

  • Major projects in the real estate market fail due to the wrong estimation of the project life cycle. Life of the project must be estimated from the first rupee infused and till the last rupee recovered. Also, the borrowing estimation (tenure) must be calculated accordingly. Tenure of the loan should be equal to the life cycle of the project; any shorter tenure loan will not work. If the tenure projected is less than project’s life, the project will face a cash crunch and if the tenure projected is more than project’s life, it may lead to a diversion of excess funds generated during its life. 
  • In any real estate project in India currently, the cost of premiums payable to government is equivalent to the cost of construction. It means there is no longer a story of doubling your money in 3 years in real estate. In fact, developers are finding it difficult to achieve even single-digit margins if the project is not executed as scheduled. Developers may have to joint their hands and contest with authorities to stagger the premium payments. In Maharashtra, for the acquisition of the project, huge premiums are to be paid to CIDCO, MHADA even before the inception of the construction of the project. If these premiums are not staggered under the measures channelized by the government to revive the industry post lockdown, developers may not be able to sustain. No bank will fund at this stage and even if funding is available, no developer will be in a position to borrow such a huge sum of money.

Few questions in the mind of developers?

How long would be the impact of Covid-19 situation on our industry?

Real Estate in India will pass through tough times for a minimum of 6 months from now. This is mainly due to their monthly fixed overheads backed by zero sales and tiny recovery from the sold inventory. People, in general, will start holding money and keep it for securing themselves from any uncertainty coming their way in the near future.

How to generate liquidity & commence ongoing projects immediately post lockdown?

Each industry will face the problem of generating liquidity. Real Estate being the second most job-generating industry, will be at the peak of its liquidity issues. One should try to generate liquidity by selling “Lock and Key” unsold stock which will help to commence ongoing projects and keep them running post lockdown.

Should we approach banks to restructure our existing loans?

Yes. RBI is already discouraging banks to keep money in RBI accounts and thereby encouraging banks to infuse more money into the system. Hence you should apply for restructuring your existing loans before they turn NPA. Even a one-time restructuring of NPA accounts may be allowed in the near future.

I have got an opportunity to merge with another developer and this will help me to complete my project in time. What should be my response?

Completing the project on time and delivering the units to the customers will enhance your goodwill in the market. “Alone we can do little; together we can do so much”. Focus on partnerships, you may partially lose control, but it is a need of the hour.

In our industry, there are always long due payments to be made to suppliers and contractors. Will the supplier continue its support after the lockdown?

The relation between developers, suppliers and contractors goes hand in hand. All are dependent on each other in some or the other form. Be in touch with your suppliers, contractors, maintain long-lasting relations, and leverage them at the right time. Relook at your existing dues and schedule a payment plan for suppliers/contracts so that required support from them stands uninterrupted

What is the strategy to be adopted to reduce the impact of the Covid-19 situation?

Relook at the project estimation right from its configuration, life cycle, funding requirements, feasibility, etc. Remember, smaller the house, easier to sell. Other than various points suggested above, “Compromise” is the only key to success to overcome the situation.

What can be demanded from the government by the developers?

Being the second-largest job-generating industry after agriculture, the government should help the real estate industry by incentivizing migrant laborers to return to their jobs as it is difficult for them to even understand the situation of lockdown. This incentive can be in the form of travel cost for coming back to the workplace and insurance, employer’s contribution towards provident fund can be exempted and the same to be provided by the government.

Ready Reckoner value to be relooked by the state government as Land revenues come under the state government. At many places in Tier 1 cities, the ready reckoner value is higher than the actual deal value which makes the project unviable for even lenders to support the developers. Though the government has reduced the stamp duty in some states like Maharashtra with effect from 01st April 2020, there should be thought for a complete waiver of stamp duty for a smaller period post lockdown to boost the Real estate industry. The state government may not be able to do this for a longer period as huge revenue comes from this segment.

Staggered payment schedule for all premiums can play a vital role in managing cash flows for any developer and thereby the industry as a whole.

What’s the say of Developers on the above?

When we gave a thought of writing something on Real Estate, we thought taking their views is also most important in the current situation. Here goes their say:-

“Compromise is not about losing. It is about deciding that the other person had just as much right to be happy with the end result as you do,” said author Donna Martini. A known developer said Compromise has to be from all sides i.e. from government, banks, RBI, and a developer. What has and will hit us badly is the demand. Unless the Rate of Interest (ROI), Fixed Obligation to Income Ratio (FOIR), and Loan to Value (LTV) are not revisited by banks, the demand will continue to be price-sensitive and we will be continued to be advised by Bankers to reduce prices by 20%.

“Reducing sale prices of flats while prices for Raw material, cost of production and other incidental costs keep increasing will not be a solution. This will lead to an even more negative outlook towards Real Estate and will spark the sentiment of distress sale on lowering prices. Such events will dishearten buyers and existing investors too”, said another developer from Tier 1 city.

One of the top builders in Mumbai also quoted “The business of real estate is very different from money lending and another commodity trading. To remain in business and to keep moving if we are paying high interest on our borrowings doesn’t mean we are making profits of more than the interest paid by us. The lenders feel that because a developer pays much higher interest, a developer may also have an appetite to reduce the sale price by 20%. The lenders should reduce the rate of interest which will certainly improve profitability and the need for the developer is for better cash flow to complete ongoing projects”.

How can InCorp India help you?

At InCorp India, we are committed to delivering quality in Transaction and Risk advisory services. Our dedicated team of transaction advisors can assist you in any real estate related issues and provide the ease for operations.

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New GST Return System

by InCorp Advisory

Reading Time: 4 minutes

New GST Return System

In the 31st GST council meeting in December 2018, it was decided that a new return system under GST will be introduced. This system is applicable from 1st April 2020. However, in the 39th GST council meeting held on 14th March 2020, the new return system was deferred from 1st April 2020 to 1st October 2020. The flow of events under new returns system will be as under:

Focus area for Monthly Return Filers-

Focus area for Monthly Return Filers-

Focus area for Quarterly Return Filers-

Focus area for Quarterly Return Filers-
$(can file daily, weekly, fortnightly, monthly)
*amendment to Form GST ANX-1 can be filed before the due date for furnishing of return for the month of September following the end of financial year or the actual date of furnishing relevant annual return.

Important points to be noted in above flow of events:

  • The credit in respect of documents edited or uploaded shall be made available through the next open Form GST ANX-2 for the recipient.
  • The liability for such edited documents will be accounted for the tax period in which the documents have been uploaded by the supplier.

 

Applying for GST return got simpler-

Annexures forming part of New GST Return System (Form RET-1/2/3):

Form ANX-1 Form ANX-2
1. Contains details of supply + other income liable to be taxed under GST
2. To be filed by supplier
3. To be filed any time before 10th of month (can       file daily, weekly, fortnightly, monthly)
4. Details to be filed
a. GSTIN of buyer
b. Document type, number, date, value
c. Total taxable value, head wise tax amount
d. Six-digit level of HSN code mandatory
e. Place of supply		 1. Contains details of purchases
2. Auto-populated on filing Form ANX-1 by supplier on real-time basis
3. 3 options for buyer:
accept, reject, pending (If not selected, it will be deemed to be      accepted)
4. If Form ANX-1 is not filed by the supplier, ITC can be claimed only in Form GST RET-1 on provisional basis
ITC on provisional basis can be allowed only till:
a. Monthly return filer: T+2 months
b. Quarterly return filer: T+5 months
(‘T’ – period for which tax return is being filed)

Applicability of new return system is as follows:

applicability of new GST return system

**ITC will be allowed till T+2 months for monthly returns and T+5 months for quarterly returns on provisional basis.
#quarterly return for turnover below 5 crores.

Switching type of returns:

One can switch from the form under which they are filing returns:

  • are allowed to switch against one another any number of times in a year: GST RET-2 to GST RET- 3, GST RET-3 to GST RET- 1, GST RET-2 to GST RET- 1.
  • are allowed to switch against each other only once a year: GST RET- 3 to GST RET- 2, GST RET- 1 to GST RET- 2, GST RET 1 to GST RET- 3

 

FAQs  for different business type-

Particulars Retailer
(all transactions are B2C) up to turnover 3 crores		 Wholesaler
(all transactions are B2B) up to turnover 3 crores.		 Any supplier with turnover greater than 5 crores Exporter
with turnover less than 5 crores
1.  Which return is applicable? Form GST RET-2 Form GST RET-3 Taxpayer needs to compulsorily file return under Form GST RET-1 on monthly basis Taxpayer can file return under Form GST RET-1 on quarterly basis
2.  Can the return form type selected earlier be changed during FY 2020-21? Any number of times in a year to GST RET-3 or GST RET-1 Can switch to GST RET-2 only once a year or taxpayer can switch to form GST RET-1 without any restrictions on number of times No No
3.  When should taxpayer file Form ANX-1? 10th day of the next month 10th day of the next month 10th day of the next month 10th day of the next month
4.  Till when can taxpayer accept/ reject/ unlock Form ANX-2? Before 25 days from the end of the quarter. Before 25 days from the end of the quarter. Before 20th of the next month. Before 25 days from the end of the quarter.
5.  How can taxpayer make the payment? Form GST PMT-08 Form GST PMT-08 Not applicable Form GST PMT-08
6.  By when can taxpayer make payment? By 20th of next month By 20th of the next month Not applicable By 20th of the next month
7.  By when will taxpayer file in GST return? 25 days from the end of the quarter 25 days from the end of the quarter 20th of the next month 25 days from the end of the quarter
8.  Can taxpayer claim ITC if supplier has not filed ANX-1? No No Yes, taxpayer can claim credit on provisional basis for T+2 months Yes, taxpayer can claim credit on provisional basis for T+5 months

Comparison of return system under GST-

Old Return System under GST New Return System under GST
1. Taxpayers considered small if turnover is up to Rs. 1.5 crores in the preceding financial year 1. Taxpayers considered small if turnover is up to Rs. 5 crores in the preceding financial year
2. ITC to be availed but which are not uploaded by the suppliers in GSTR-1 shall not exceed 10% of “eligible credit” available. 2. ITC available is restricted to the amount reflected in portal
3. Relief was provided for mentioning HSN code on the invoice based on certain turnover limits. 3. Six-digit level HSN code is mandatory for:
a. If turnover is greater than 5 crores
b. Export /Deemed export /Import / SEZ supplies
4. ITC bifurcation not required in returns 4. Bifurcation of ITC is compulsory in returns:
a. ITC on services
b. ITC on capital assets
c. ITC on inputs
5. Interest was to be computed on suo moto and were liable to be paid in the returns filed. 5. Interest will be calculated by system (auto-calculation on portal).

Please note that new GST return forms for Composition taxpayers, Unique Identification Number (UIN) holder, Input Service Distributor (ISD) are yet to be notified.

At InCorp, our GST Team provides seamless support with GST registration, filing GST online and GST refund. Explore all our GST services and feel free to get in touch with our experts today.

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Indian Budget 2020 – Shifting Tax Paradigm for NRIs

by InCorp Advisory

Reading Time: 5 minutes

The Union Budget 2020 has proposed to introduce a stringent ‘Anti-abuse’ provision that every Indian citizen who is not liable to tax in any other country, by virtue of his domicile or residence, shall be deemed as a resident of India for tax purpose.

Consequently, his global income would be taxable in India. Further, tightening the residency provisions, the Budget 2020 also proposed to reduce the cap on period of stay in India to 120 days from the present 182 days for Indian Citizens/Persons of Indian Origin (PIOs) to be categorized as NRI.

Let’s evaluate these proposals in detail.

The rationale behind the proposal’s tax on NRIs:

Rationale behind the proposals tax on NRIs

As per the memorandum to the Budget 2020, “Tax laws should not encourage a situation where a person is not liable to tax in any country particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.” However, the Government later clarified that the proposed tax on NRIs will not apply to bonfire Indians working in tax-free foreign countries and is intended to tax only those seeking to escape tax by exploiting their non-resident status. In one of the interviews with PTI, Revenue Secretary Ajay Bhushan Pandey said the new rule was “an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working overseas. Somebody who is a citizen of India and sitting in a tax haven and not paying taxes, then he has to pay tax”.

As regards residency rule for Non-Resident status in India, the Memorandum states “…Individuals, who are carrying out substantial economic activities from India, manage their period of stay in India, to remain a non-resident in perpetuity and not be required to declare their global income in India,”  In the current scenario, if an Indian or a person of Indian origin managed his stay in India such that he remained a non-resident in perpetuity, he was not liable to pay tax on his global income in India. Reproducing quote of Revenue Secretary Ajay Bhushan Pandey in one of the interviews “…In many cases we have found that some people are residents of no country in the world, they may be staying a certain number of days in different parts of the world. So, any Indian citizen – if he is not a resident of any country in the world – would be deemed to be resident in India, and then his worldwide income will be taxed in India.”

Check Residential Status

HERE

Impact of the Proposal:

Budget 2020 proposed to tax NRIs who do not pay taxes in any foreign country

Budget 2020 has proposed to tax NRIs who do not pay taxes in any foreign country and tightened the screws on those seeking to escape tax by exploiting their non-resident status. Indian citizen shall be deemed to be resident in India if he is not liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it is noticed that some Indian citizens shift their stay in low or no tax jurisdictions to avoid payment of tax in India. However, it is worth noting here that non-resident Indians living in the US, Canada, Singapore, and Hong Kong already have worldwide tax in place or have taxation treaties in place with India.

However, to avoid confusion and fear amongst genuine NRIs earning abroad in no tax jurisdiction, the Government has later issued clarification relaxing genuine NRIs stating “No tax implication proposed for those Indians who are bonafide workers in other countries, including in the Middle East, and who are not liable to tax in these countries on the income that they have earned there.” This means the tax incidence in a foreign country coupled with the circumstances of the person living there needs more focus than the tax rate in such a country.

Regarding Residency provisions, while as of today, it is possible to be classified as a non-resident by staying out of the country for at least 183 days, this has now been, in effect, proposed to be enhanced to 245 days. Therefore, with the proposed amendment in reducing the cap on stay in India, the Non-Resident must remain substantially out of India during a financial year for considering him for Non-resident status under Income Tax Act, 1961.

However, to avoid hardship to genuine Non-Resident visitors, the Government has later clarified that “In case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Necessary clarification, if required, shall be incorporated in the relevant provision of the law.” This would benefit NRI visiting India for some emergency such as medical treatment or legal clearance about succession on account of the death of any parent or guardian if his stay in India exceeds 120 days in a particular year. The idea of curbing the cap on the stay in India is to discourage NRI to play with the loophole of 181 days stay in India (substantial stay of appx. 6 months), managing all his global affairs from India for substantial time and still not being liable to the Tax jurisdiction of India.

Tax implication from Budget 2020 proposals:

  • NRIs however, saw a welcome announcement in terms of interest payment made to them on investments in bonds including Municipal Bonds, which would be offered at a concessional withholding rate of 5 percent until June 30, 2023.
  • Non-resident Indians were even exempted from filing income tax returns in India if their total income consisted of dividend or interest income, royalty or fees for technical service and certain TDS income.
  • Deeming some NRIs who aren’t liable to tax in any other country and considering them as a deemed resident in India based on Indian Citizenship would mean that they would have to pay a tax ranging from 5.20% to 42.74% percent on their global income in excess of INR 2,50,000/- on a slab rate basis, even though they do not enjoy any benefits in the country nor earn any income from India.
  • The anti-abuse measure of taxing citizens who are not residents of any country may affect genuine cases like seafarers who are on International waters for the most part of the year but now will be subject to tax in India.

InCorp Advisory view on Shifting Tax Paradigm for NRIs

InCorp Advisory view on Shifting Tax Paradigm for NRIs

As of now, the taxation of resident Indians and NRIs goes something like this. If one’s status is ‘resident Indian,’ then his global income is taxable in India, wherever earned or received. However, one needs to pay tax only on his Indian income if he is an NRI. The Indian income can be salary received in India, payment for services provided in India, rent from a house property situated in India, capital gains on transfer of asset situated in India, dividend from shares, interest earned from fixed deposits, bonds with Financial Institutions or savings bank account in India, etc.

With more and more Indians trying to hide their taxable income by diverting their money abroad in no tax jurisdiction, the Finance Minister has taken several steps in this Budget 2020 to put an end to this mode of tax evasion.
With this proposal, tax incidence on some non-resident Indians (NRI) would shift to taxation based on “Citizenship of India”. The measures are bound to impact NRIs negatively.  It is expected that such changes in the definition may deter NRIs from coming to India and some can even think of giving up Indian citizenship. However, relaxing provisions make the Government’s intention clear not to harass genuine NRIs, and considering the speed at which clarifications were given on the next day of the budget being Sunday, it also shows their determination to respond to public sentiments in a positive manner.

Determining the applicability of the proposed NRI tax law to your specific situation? 
Determining whether you are required to file your income tax return in India as an NRI and how?

At In.Corp, we are committed to delivering quality in assurance, advisory and tax services. Our dedicated team of tax experts can help you solve problems on the following matters:

  • Determination of residential status for the upcoming year.
  • Tax implication on foreign income.
  • Disclosure and other necessary compliance of foreign income.
  • Tax implication on foreign assets.
  • Disclosure & other necessary compliance of foreign assets.

For any additional information, please reach out to us at info@incorpadvisory.in.

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