"Union Budget 2010-11 addresses the real estate sector in many ways, the impact of which is latent at first comprehension. The service tax net has been widened to include the activity of construction as deemed taxable service provided by the builder to the prospective buyer during the construction period. The fate of STPI units has been jeopardized by its conspicuous absence in the speech of the minister. However, the impact of these changes could be significant if it means an end to the fiscal benefits provided to STPI units and rise in real estate prices due to service tax levy.

On an overall basis, the ‘Economic Survey’ and the ‘Union Budget’ point towards India’s success in combating the economic crisis and its return to a robust growth path with an estimated GDP growth of 7.2 per cent for financial year 2009-10 and 8.5 per cent for the subsequent year.

Service Tax Impact: Applicability of service tax has been extended to include deemed provision of construction service to prospective buyer, if the service is provided before completion of construction. The builder would therefore, now be paying a service tax on the ‘activity of construction’. As a result, the buyers, across the board, would be paying higher price for its property which is under construction. Moreover, the demand for completed property will increase and would command a relative premium over under-construction projects. While the likely intention of this policy pronouncement is to encourage quicker completion by developers and discourage speculation in under construction projects, the manner in which the market responds to this new service tax would have an impact on business planning of developers in the long run.

STPI Tax Benefits: Tax benefits, currently available to Software Technology Parks of India, are scheduled to expire in March 2011. By not addressing the extension of the scheme, this budget marks a likely end to this scheme. This could mean a direct demand fillip to SEZs, which would then be the only tax haven for IT/ITeS companies in India. IT/ITeS being the prime driver of office real estate market across major cities in India, both the development pace and pricing dynamics of SEZ could undergo a major change over the short to medium term. However, the government could extend STPI tax holiday via a notification before the expiration.

The budget has also given, other than the above mentioned issues, some marginal relief to housing and real estate. Interest subvention of 1 per cent on loans up to Rs10-lakh on property up to Rs20-lakh has been extended by one more year. Also, one year extension for completion (from four to five) has been accorded to pending housing projects to avail tax deductions. This is positive news for the development of affordable housing and housing in general. However, the cost of construction will rise marginally with the partial rollback of excise duty on cement.

In conclusion, this budget is viewed with clear focus on rationalisation of policy related to real estate. The altered personal income tax structure, which will increase the disposable income of almost 60 per cent of Indian taxpayers, is likely to improve the housing demand. We expect these measures to have a long term positive impact on the sector. Though, in the short term, the realty sector may undergo several realignments as a consequence of the changes made".