Real estate investors are dreading about marginal capitalization that has turned up in budget combined with Real Estate Regulatory Act (RERA), which would seek a marked up tax level. All investors’ unease this moment while they are thinking that their investments in existing real estate companies, to be precise on projects skeptically impacted for couple of real estate regulatory rules. For investors (private equity and strategic) are renegotiating their on hand agreements.
It’s expected that the think capitalization brought in the budget combined with RERA would check with increased tax and other legal accountabilities starting from April, 2017.
This thin capitalization won’t be in favor of companies to claim tax deduction for interest paid on foreign balance due above 30% of their EBITDA (earnings before interest, tax, depreciation and amortization). This movement is anticipated to shock real estate and infrastructure industry which have been carrying huge dollop of debt in international market at project level or in their SPVs. Central government is likely to classify investments through non-convertible debentures (NCDs) and the dividend remunerated on that too as debts.
Thin capitalization model would be implemented to all companies working in India starting April 2017, side by side the Base Erosion and Profit Shifting (BEPS) agenda, a global agreement with 15 action points to ensure tax avoidance by multinationals. Moreover, India has already accepted a few of these rules.
The fear is also that under RERA investors might own a permanent tag of developer and may have to face stringent penalties for any defiance of rules by the realty or infrastructure projects they finance. Any project observation duty under the RERA lies on the promoter. And the term has a broad classification to envelop; it includes the developer, the landlord and private equity or strategic investor, if they straightaway invest in the project. Many private equity as well as strategic investors, who have invested in real estate, mainly at the development stage, are renegotiating their agreements, with the developers anticipating the legal consequences and penalty charges once the new real estate regulations gets completely in action.
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