Decoding the Budget
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Decoding the Budget

Decoding the Budget

01 Mar 2016 Long Read
CW offers a detailed analysis of the Union Budget 2016.

The Indian construction industry has grown consistently in the recent past. The overall gross value addition (at current prices) has been around 8.04 per cent and around 26.87 per cent of the overall industry sector´s contribution.

Current scenario
As depicted in the figure below, each segment is regulated and implemented by different apex bodies. The construction sector is a major job creator in both skilled and unskilled categories. Low entry barriers in terms of technology and capital have made this industry highly fragmented. The sector is beset with high working capital and requirement of adequate execution skills to counter various project risks in terms of labour, material and approvals.

The industry has been facing certain challenges in recent times:

  • Financial viability: Low cost recovery cycles.
  • Planning: Lack of long-term integrated planning.
  • Long-term funds: FDI inflows slowing.
  • Procedural clearances: Land acquisition, multiple approvals.

However, there have been a slew of measures to improve the overall scenario of the construction sector in the country.

  • Delicensing: 100 per cent FDI in the material handling equipment industry.
  • SEZ: The government has granted several SOPs to drive the capital goods industry.
  • Tariffs and customs duties: Reduction in customs duty for construction equipment.
  • Infrastructure fund: The government has created infrastructure debt funds with attractive interest rates.

The real-estate sector in India consists of the residential, retail, commercial and hospitality segments. The performance of this sector is dependent primarily on the residential and business environment that triggers demand for office premises as well as urban and semi-urban accommodations. The Government of India has initiated numerous steps to nurture growth in the sector. The Smart City Project, with the ambitious aim of developing 100 smart cities, is a major opportunity for corporates in this sector. Further, the government has initiated the process to implement its æHousing for All´ scheme by 2022, and eased regulatory requirements to enable FDI to flow into the construction development sector more easily. The Securities and Exchange Board of India (SEBI) has also prepared and notified a structured framework to regulate the functioning of real-estate investment trusts (REITs) and infrastructure investment trusts. This will facilitate access to liquidity and credit for developers active in these areas, and create a completely new investment avenue that will widen participation in these sectors.

Key expectations from Budget 2016

  • Tax benefit for home buyers has come to be an annual expectation from the Budget to enable pickup in property sales and housing purchases. This may be in various forms, from direct change in ceilings of tax benefits to period of benefit, benefit on second house, etc.
  • Single-window clearance for approvals and accordance of industry status for the realty sector.
  • Implementation of the Real Estate Development and Regulation Bill.
  • Increased allocation for infrastructure across Sagarmala, Bharatmala, National Highways (NH), Inland Waterways, Irrigation, Swacchh Bharat and Urban Infra programmes, among others.
  • Other direct or indirect tax benefits for the steel, cement and construction equipment industries that could lower their costs; the impact of this could be passed on to buyers and users, thereby affecting lower prices and off-take.

Announcements to create opportunities
The recent Railway Budget 2016-17 pegged capex at Rs 1.21 lakh crore; and proposed to implement rail connectivity under PPP for Nargol and Hazira ports, redevelop 400 stations through PPP, electrify 1,600 km of railways this year and 2,000 km in the next financial year, and much more. Such initiatives will add to demand for construction in the country.

With ´Infrastructure Focus´ being one of the nine pillars on which Budget 2016 is built on, here are the key announcements in the Budget:

  • Twenty-eight lakh hectare to be brought under a new farm irrigation plan; a dedicated irrigation fund worth Rs 20,000 crore to be set up under NABARD; and 89 irrigation projects under AIBP to be fast-tracked.
  • Ten thousand km of NH in 2016-17 and 50,000 km of state highways to be converted to NH road; 85 per cent of stalled road projects back on track; and road transport in the passenger segment to be opened up to the private sector.
  • Rs 55,000 crore allocated for roads and highways; an additional Rs 15,000 crore to be raised by NHAI through bonds; the total allocation to the roads sector is Rs 97,000 crore, including Rs 19,000 crore allotted for PMGSY.
  • Total outlay for infrastructure is Rs 2,21,246 crore in 2016-17.
  • Work of national waterways already being expedited and 160 non-functional airports to be developed at a cost of Rs 50-100 crore each; and 10 of 25 defunct airstrips to be developed in partnership with state governments.
  • Key initiatives for the private sector in the infra sector were the introduction of the Public Utility Resolution of Disputes Bill for resolution of disputes during 2016-17; issue of guidelines for renegotiation of PPP concession agreements; and introduction of a new credit rating system for infra projects.
  • Other announcements include the customs single-window project to be implemented at major ports and airports from the beginning of the next financial year; Rs 9,000 crore allocated for Swachh Bharat; and 300 urban clusters to be set up under the Shyama Prasad Mukherji Rurban Mission.

Among the Tax Proposals, the following are relevant for the real-estate and construction or infra sectors:

  • Suitable changes to be made in customs and excise duty rates to improve competitiveness and boost Make In India.
  • Service tax exempted on construction of affordable houses up to 60 sq m under any scheme of the Centre or state government, including PPP schemes.
  • Additional tax relief of Rs 50,000 for first-time home buyers for up to Rs 35 lakh loan, provided cost of the house does not exceed Rs 50 lakh.
  • Hundred per cent deduction for profits to a housing project undertaking for flats up to 30 sq m in the four metro cities and 60 sq m in other cities, approved during June 2016 to March 2019 and completed in three years; MAT to apply.
  • Infrastructure cess of 1 per cent on small petrol, LPG, CNG cars, 2.5 per cent on diesel cars of certain capacity and 4 per cent on other higher engine capacity vehicles and SUVs. No credit of this cess will be available nor will credit of any other tax or duty be utilised for paying this cess.
  • Extension of excise duty exemption, currently available to concrete mix manufactured at site for use in construction work, to ready-mix concrete (RMC).
  • Distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to dividend distribution tax, with respect to the dividend distributed after the specified date.

The impact

  • Excise duty exemption for RMC manufactured and consumed at site is a relief to the real-estate industry. There was confusion after a recent SC decision, wherein it upheld exemption only to concrete mix and not to ready-mix concrete based upon interpretation of a notification.
  • Exemptions provided on housing loan interest for first-time home buyers and affordable housing will boost the stressed residential sector.
  • Scrapping of dividend distribution tax on REITs will help developers raise funds, as this makes investments attractive for investors.
  • With a large allocation to infrastructure (in terms of outlay for roads and railways and developing smaller airports to improve regional connectivity) and incentives to MSME, Make in India will get a further boost that will benefit the real-estate sector in the long run.

The Budget announced a slew of measures to revitalise and encourage private-sector participation with greater allocation to roads and railways and efforts to put stuck projects back on track. The initiatives taken in the real-estate sector shall consequently drive demand for other sectors like cement and steel, thereby boosting overall construction activity.

How does 2016-17 look for the building, construction and infrastructure sectors?
The growth of the infrastructure sector is expected to pick up with significant allocation to the roads, irrigation, waterways and urban infra sectors. This could lead to an increase in construction activity, though we can expect more of this to come through in the second-half of the year, as there is time between the announcement and tenders being awarded. Further, the monsoon (June to September) is typically a slower period of construction activity that provides ample opportunity for government agencies to undertake pre-tendering work across Q1 and Q2 and enable on-ground works to start by September-October.

With enactment of laws and policies pertaining to PPP concessions, the sector could see stressed assets and projects stuck midway being revived, leading to the resumption of construction in these projects. This could allow companies with those orders on their books to realise their revenues versus greenfield projects. Again, however, the timeliness of enactment of these would be critical to ascertain how rapid the impact on the market would be.

The tax benefit on housing is a welcome move and must be seen not only in light of the tax breaks themselves, but an increase in other disposable income of citizens that could be channelled into the housing sector, as the direct tax burden on consumers has not been increased otherwise. Smaller housing segments (LIG, MIG) may be greater beneficiaries as the tax breaks are on smaller dwelling units and houses of value up to Rs 50 lakh. The push for low-cost housing is a plus for companies and is aligned with the government´s intent to take care of the needs of the economically challenged strata by incentivising developers to drive this segment.

However, concerns about the financial ability of the government to provide budgetary funds for infrastructure development abound as the fiscal deficit is capped and the global financial situation is not conducive for increased capital flows. The infra cess on cars to provide funds is a positive for the infra sector, but will dampen the auto sector. Also, the Land Acquisition Bill is not being discussed, which brings execution challenges to the fore and questions on what models public agencies will utilise to provide land for infrastructure. Further, with no time-bound execution of the Real Estate Bill, the much-needed transparency in the real-estate sector, which will have prompted foreign investors to enhance their allocations in India, still remains elusive.

Push for Infrastructure Growth
The Central Government is also pushing for infrastructure growth in the country with a spending proposal worth $1 trillion. This encompasses initiatives such as:

  • Smart Cities Mission: 500 smart cities in the country for local area development.
  • Atal Mission for Rejuvenation and Urban Transformation (Amrut): Upgrading city infrastructure.
  • Pradhan Mantri Gram Sadak Yojana (PMGSY): Road development in rural areas.
  • Indira Awas Yojana: Permanent shelter for the rural poor.
  • Jawaharlal Nehru National Urban Renewal Mission (JNNURM): Infrastructure in urban India.
  • National Highways Development Programme (NHDP): Creation and upgradation of new highways.
  • Pradhan Mantri Krishi Sinchayee Yojana (PMKSY): Irrigation facilities in each village.

About the author:
Sameer Bhatnagar, Director, KPMG
, plays a leadership role in the company´s Infrastructure and Government-Strategy & Operations practice. With over 15 years of experience, he brings to the table a wealth of advisory experience in the infrastructure sector with expertise in strategic planning, industry analysis and financial advisory.

(With inputs from Neha Saraf and Abhijit Kirtunia, Senior Consultants, KPMG)
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