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Tax relief to lead to more investments, unlikely to impact real estate

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By Anwesha Ganguly &
Shashank Dipankar

The government’s move to reduce the effective rate of corporate tax to 25.17% on Friday is expected to boost profits of infrastructure companies and encourage re-investments into infrastructure projects. Industry officials say that the move will lead to an estimated reduction of around 9% in their tax expenses. However, the impact will be limited for the real estate sector unless consumer demand picks up.

The tax reduction is unlikely to be transferred to the customers in the real estate industry, said industry experts. Oberoi Realty, for instance, has a tax rate of 30.6% and Brigade Enterprises of 34.2%.

Samrat Verma, analyst at Kotak Institutional Equities, told FE, "This move will not affect the demand of housing much. Even if the benefits are passed on to consumers, we do not know how much of a dent in the pricing it would make". However, Sangeeta Prasad, managing director and CEO, Mahindra Lifespaces, said the move will boost liquidity. Last week, the government had announced a Rs 20,000 crore real-estate stressed asset fund.

According to industry estimates, more than 5.5 lakh units are stuck or delayed in India's top seven cities. Rajeev Talwar, managing director, DLF, said that similar strong steps are needed in boosting housing demand.

"You need a similar relief in direct taxes for the 300 million plus largely salaried middle-class to boost real estate demand," Talwar said.
However, infrastructure sector has given a thumbs-up to the tax rate reduction as it is likely to boost the business for EPC contractors, which form a large portion of infrastructure industry.

The associated benefit to government would be better valuations on asset monetisation and lower outgo in case of construction contracts, analysts at Crisil observed. L&T has a tax rate of 29.8%, while NCC has a tax rate of 33.4%. Nitin Patel, executive director, Sadbhav Enginnering said that the company's tax expense for the financial year 2019-20 will reduce to 25.17% from the earlier estimate of 33.34%.
Infrastructure companies currently enjoy tax deductions under section 80 I (A) of the Income Tax Act. The deductions are applicable on a company's profits from the business activities for 10 consecutive years out of 15 years from the date of its commencement.

"A number of infrastructure companies (which were enjoying timebound exemptions) are coming into the fully-taxed category this year. Today's move will definitely give a straightaway advantage to them," Patel said.

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Jagannarayan Padmanabhan, director, transport and logistics, Crisil Infrastructure Advisory, said, "This move will indirectly benefit banks as well, since developers will get additional headroom to service their debt". New investments into the infrastructure sector are expected to remain muted unless banks are more forthcoming with lending to infrastructure and real estate companies, Patel said.

According to Vinayak Chatterjee, chairman, Feedback Infra, another measure that the government can consider using to spur investments across sectors, not just the infrastructure sector, is providing investment allowance. "Investment allowance is tax incentive to encourage capital investment wherein businesses may deduct a percentage of capital costs from their taxable income," he said.