Introduction
The Indian economy has been witnessing an unprecedented growth with the GDP growth averaging 8% over the last three years, up from an average of around 6% during the 1990s. The principle drivers of India's GDP are changing demographics, rising levels of foreign investment, a vibrant services sector powered by the IT and ITES sectors and buoyant exports. Notwithstanding concerns over lack of structural reform, these factors are likely to be sustained in the foreseeable future, resulting in continued strong GDP growth.
This economic growth has, in turn, stimulated demand for real estate to help meet the needs of business, such as modern offices, warehouses, hotels and retail shopping centres. It has also boosted housing demand as a wealthier populace seeks upgraded accommodation. Moreover, shrinking household size and improved access to housing finance have boosted the demand for residential property. Tax incentives have also been granted to interest and principal paid on home loans, which has made owneroccupied property more attractive.
According to research estimates, the Indian real estate market is expected to grow from US$ 14 billion in 2005 to US$ 45-50 billion in 2010 and reach US$ 90 billion by 2015.
Regulatory and Taxation Landscape
Historically, the Indian real estate market has been disorganized, fragmented and governed by archaic laws; the liberalization of real estate industry lagged other sectors. However, during the last few years, the Indian real estate industry has been gradually transforming. What was once a highly fragmented business, dominated by regionally based private entrepreneurs is gradually becoming a national and global business.
This makeover has been fostered by significant growth in capital formation in the real estate industry and rise of more sophisticated real estate capital markets. This has been primarily driven by listed/unlisted real estate companies, private real estate funds and heightened focus on Indian real estate by leading international property consultants and commercial banks.
The partial relaxation of Foreign Direct Investment ("FDI") regulations in February 2005 permitting foreign investment in the real estate sector subject to certain guidelines has acted as a major catalyst resulting in significant foreign investment in the Indian real estate market. Leading private equity players and property funds have since raised/allocated significant amounts for investment in the Indian real estate market.
While the foreign investment guidelines have been partially relaxed there continue to be several restrictions on foreign investment in the real estate sector. For instance, the current FDI regulations only permit investment in certain specified projects in the real estate sector in India. Further, the regulations contain various conditions to be satisfied in respect of such investments such as minimum investment, minimum area, lock in period of the investment etc. Further, foreign debt is currently completely prohibited in the real estate sector and the use of convertible instruments has also been recently blocked.
Further, the tax regime in respect of the real estate sector in India is bogged with various taxes which include income tax (on business income and on capital gains), indirect taxes (includes Value Added Taxes and Service tax) and other transaction taxes (property tax and stamp duties). In fact, as per reports, India has one of the highest levels of Property Taxes and Stamp Duty among the major countries in Asia.
Special Economic Zones ("SEZ")
The boom in the Real estate sector has also been recently fueled by the fiscal incentives package offered by the Government in the recently introduced policy on SEZs.
SEZs aim to provide an internationally competitive duty-free environment for exports, supported by world-class infrastructure, to achieve a quantum jump in exports.
As per the SEZ policy, an SEZ would be a specifically delineated duty-free enclave that is deemed to be outside the customs territory of India. Further, the policy is a comprehensive legislative framework in order to meet the long-standing industry demand for a single enabling legislation for SEZs and provides various tax concessions, including concessions in respect of taxes on income and indirect taxes, to the Developer of the SEZ and to the units located in the SEZ.
The SEZ initiative of the Government, though marred with political controversies, has been received with significant enthusiasm by the Industry and has caught the fancy of foreign investors.
Mauritius – Preferred Jurisdiction for Investment Flows
One of the critical elements for structuring foreign investment into Indian real estate companies is the choice of the jurisdiction for routing such investment into India. Historically, Mauritius on account of the favorable Double Taxation Avoidance Agreement ("DTAA") with India and its favorable tax and regulatory regime has been the preferred choice of jurisdiction for routing investments into India. In fact till date, Mauritius accounts for the maximum FDI into India. The story has been no different in the real estate sector and Mauritius continues to account for a significant proportion of the foreign investments in the real estate sector.
Abhishek Goenka & Kalpesh Maroo BMR & Associates, India Member of Taxand Global Alliance
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