| Log in

Budget 2014: A significant booster for REITS

11 July, 2014

Despite SEBI publishing the much awaited draft SEBI (REIT) Regulations, 2013 (“Draft Regulations”) in October 2013, it had seen little movement primarily on account of lack of clarity around its tax treatment. Finally, as widely expected by the industry, today’s budget announcement by the newly formed NDA government (“Budget 2014”) appears to have provided clarity on this paving way for the introduction of REITs in India. 

Under the budget proposals, REITs have been envisaged in the nature of ‘business trusts’which would raise money from investors through issue of units and the same may be invested in income bearing assets held by the trust through a controlling interest in an SPV. It further envisages that the asset will brought in by the sponsor through transfer of SPV shares into the REIT. 

Under the head of promoting socio-economic growth, the Budget 2014 puts forward the following proposals with respect to the taxation of REITs and Infrastructure Investment Trusts:

(a) Transfer of the SPV from the Sponsor to the trust: Capital gains arising at the time of transfer of the SPV to the REIT to be deferred to the time of disposal of the REIT units by the Sponsor. While the preferential capital gains treatment on transfer of REIT units will not be available (pursuant to point (c) below), however for the purpose of computing capital gains, the cost and holding period of the shares of the SPV will be taken into account. This was a demand from the potential sponsors of REIT without which the whole regime would have been a non-starter since the sponsors would have been saddled with significant amount of capital gains tax upon contribution of their assets to a REIT. 

(b) Income of REITs: 

i.Interest Income: Interest income from the SPV holding asset shall be accorded a pass-through tax treatment whereby no tax will be levied on such income in the hands of the REIT and withholding being applied on distribution of such interest by the SPV.However, distribution of such interest income to the unit holders will attract  withholding tax at the rate of 5% in case of non-residents and 10% in case of resident Unit holders;

ii. Dividend income: Dividend income received from the REIT from the SPV shall be exempt from any tax, however the SPV may have to pay dividend distribution tax on any distribution as applicable;

iii. Capital Gains: To be taxed at the REIT level at the applicable rate, however any distributions to the investors shall be exempt from further taxation; and

iv. Other Income: Any other income of the REIT trust will be taxable at the maximum marginal rate of 30%.

(c) Income of Unitholders

i. Interest Income: Interest income net of withholding distributed by the REIT to the unitholder will be subject to tax at the regular rate;

ii. Dividend income: No further tax on the dividend income in the hands of the Unitholders;

iii. Capital Gains: Any income distributed by REIT which relates to capital gains on sale of SPV shares shall not be subject to any further tax in the hands of the Unitholder. However, any sale of the REIT units by a Unitholderon the stock exchanges would attract the same levy of securities transaction tax and will be given the same tax treatment as sale of equity shares, i.e. long term capital gains shall be exempt and short term will be taxed at 15%. This is expected to provide tax efficient liquidity for the holders of REIT units and parity with their listed equity investments; and

iv. Other Income: No further tax.

Further, the tax proposals clearly envisage that any tax paid by the REIT shall be for and on behalf of the unitholders and hence to that extent the unitholders should be able to avail any eligible deductions or set-offs against their other relevant income.This should be welcome by the industry as this would provide a real ‘pass-through’ of income and tax to unitholders. 

Further, the proposal appears to allow REITs to hold assets through SPVs thereby alleviating the need to transfer underlying assets to the REIT and the associated stamp duty costs which has been the other big concern for the industry. 

However, one issue that would require either more clarity would be that since the SEBI REIT regime envisages REIT to either hold the assets directly or through SPVs, whereas the tax proposals above appear to only deal with REITs where the assets are held through SPVs. It is unclear as to whether REITs owning direct assets would be entitled to claim the benefits under the above provisions.

The aforementioned tax proposals are to take effect from 1 October 2014. While the SEBI regulations are yet to be notified, we believe that these clarifications around taxation of the REITs would give a significant impetus to the development of the REITS regime and much needed boost to the real estate industry in India. It appears that with the tax proposals now being in place, we may finally see REITs seeing the light of the day. Further, the trickle-down effect of REITs on invigorating the stock markets would surely be the other benefit that the government seems to have given consideration to while prioritising this regime in the maiden budget. And finally, once SEBI and RBI paves way for FPI participation into REITs, which is also very likely, foreign investors will have a great opportunity to participate in developed, yield generating real estate asset which is otherwise restricted for FDI investors. 

(Siddharth Shah is a partner and Divaspati Singh is a senior associate at Khaitan & Co.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.


Leave Your Comment
SEBI allows debt capital raise by REITs, InvITs

SEBI allows debt capital raise by REITs, InvITs

Ankit Doshi 4 days ago
Capital markets regulator Securities and Exchange Board of India (SEBI) on...
SEBI approves setting up REITs, InvITs; several tweaks in final norms for REITs

SEBI approves setting up REITs, InvITs; several tweaks in final norms for REITs

Anuradha Verma 3 years ago
The capital markets regulator Securities and Exchange Board of India (SEBI) has...
SEBI to relax REIT rules to attract investors

SEBI to relax REIT rules to attract investors

PTI 1 year ago
With an aim to make REITs more attractive to investors, markets regulator Sebi...
No Comments

Budget 2014: A significant booster for REITS

Powered by WordPress.com VIP