Tax-free townships lure FDI & NRI
By Advocate J.G. Arora, Mumbai

Tax-free townships and housing projects are the most tempting proposition for Foreign Direct Investment and Non Resident Indian entrepreneurs to rush to India.

A few years back, no one would have imagined that India which as per its Constitution's preamble is a Socialist Republic would invite Foreign Direct Investment for building such townships, and also offer full income tax exemption to the income arising from this business.
As per George Bernard Shaw, "One who is not a socialist at 20 has no heart; and one who remains a socialist at 40 has no head." Like other developed nations of the world, India too has become seasoned and pragmatic; and is allowing market forces to have a freer play. In this write-up, I have taken up the issue of incentives for Foreign Direct Investment in real estate and housing industry.

Liberalism and FEMA

Foreign Exchange Regulation Act, 1973 (FERA) was one of the instruments of exercising strict government control over the nation's economy. Along with other measures of liberalization, the stringent FERA was also replaced by a liberal Foreign Exchange Management Act (FEMA), 1999 which came into effect from June 1, 2,000. Foreign Exchange Management Act, 1999 has to be read with Foreign Exchange Management Rules, 2000 as also with Reserve Bank of India's numerous Regulations issued in 2000, various Press Notes and plethora of Circulars, Notifications and Master Circulars issued under FEMA from time to time. While earlier, only the Non-Resident Indians (NRIs) were permitted to invest in Housing and Real Estate sectors, Reserve Bank of India's Circular known as Press Note 2 of 2005 dated March 3, 2005 and Press Note 4 of 2006 dated February 10, 2006 have vastly widened the field and opened the floodgates for Foreign Direct Investment (FDI) in "townships, housing, infrastructure and construction/ development projects."

As per Press Note 2 dated March 3, 2005, in order to boost economy and create employment, the government has decided to allow FDI up to 100 per cent under the automatic route in townships, housing, infrastructure and construction-development projects (which would include, but not be restricted to housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).

The above-mentioned Press Note 2 dated March 3, 2005 also specifies the guidelines regarding the size of the project, amount of investment, repatriation of funds, and other matters. As per the said guidelines, minimum area to be developed under each project has been fixed at land area of 10 hectares for development of serviced housing plots, and built-up area of 50,000 square metres for construction-development projects, and fulfilment of any one of the said two conditions in case of a combination project. Besides, these guidelines prescribe minimum capital at US $ 10 million for wholly owned subsidiaries and US $ 5 million for joint ventures with Indian partners. Moreover, it is also stipulated that the funds would have to be brought in within six months of commencement of business. Regarding repatriation, the said Press Note clarifies that original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor can exit earlier with Government's permission. It is also laid down that at least 50 per cent of the project must be developed within a period of 5 years from the date of obtaining all statutory clearances.

Subsequently, vide Press Note 4 of 2006 dated 10.2.2006, provisions regarding Foreign Direct Investment in a number of sectors were further liberalized. Vide serial number 11 of paragraph number IV of Annexure to Press Note 4 dated 10.2.2006, provisions regarding automatic entry route, and 100 per cent FDI cap/equity in construction-development projects including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships, as also other guidelines given in Press Note 2 dated March 3, 2005 were reiterated. The said Press Note dated 10.2.2006 also stated that for investment by Non Resident Indians, conditions mentioned in Press Note 2 dated March 3, 2005 were not applicable. Thus, NRIs have been given a special and preferential treatment in this regard. All these stipulations have been re-affirmed vide items number 23 and 6 of Annexure 2 of Master Circular Number 2/2006-2007 dated July 1, 2006.

No Income Tax on townships

Section 80-IB (10) of the Income Tax Act, 1961 exempting the entire income from specified housing projects from income tax invites Foreign Direct Investment and NRIs to rush to India.
Sub-section (10) of Section 80-IB exempts an industrial undertaking's entire income from developing and building housing projects approved before the 31st day of March, 2007 by a local authority if such undertaking completes such construction within four years from the end of the financial year in which the housing project is approved by the local authority; and the project is on a plot of land admeasuring at least one acre. Further, the conditions relating to the time limit for completion of the project and minimum size of plot are also waived in respect of the housing project carried out in accordance with the notified scheme framed by the Central or State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas. Section 80-IB (10) also stipulates that each residential unit should have a maximum built-up area of one thousand square feet in Delhi or Mumbai and one thousand five hundred square feet at any other place; and the built-up area of the shops and other commercial establishments included in the housing project should not exceed five per cent of the aggregate built-up area of the housing project or two thousand square feet, whichever is less.

If marketed and implemented properly, these provisions can drastically improve the housing and infrastructure position of the country. Future seems bright for prospective investors as also for the real estate and housing industry. It will be interesting to watch the global response.