LISTING GETS EASIER - Tax on REIT Income Passes to Investors

Mar 01 2015 : The Economic Times (Mumbai)

LISTING GETS EASIER - Tax on REIT Income Passes to Investors

Sobia Khan & Kailash Babar

Bengaluru | Mumbai:





Finance minister Arun Jaitley proposed to make the path slightly easier for Real Estate Investment Trusts (REITs) to list, allowing pass-through on rental income and doing away with capital gains tax issue for the sponsors.However, the capital gains tax will be applicable for direct transfer of real estate to these trusts.

REITS are vehicles for real estate companies to sell down income-producing assets in the market to investors and use the cash to invest in other projects. If an asset is directly owned by the trust, its income will be taxed at the unit holders' hand and the trust need not pay tax. A domestic investor will be taxed at 10% for this while a foreign investor will pay tax as per India's tax treaty with that country . If the asset is held through a special purpose vehicle and not directly, dividend distribution tax (DDT) will be applicable. The industry was seeking removal of DDT, but the FM has not accepted this request.

The move may boost REIT listing in India, allowing faster and smoother exits to investors in a sector hit by funding constraints. REITs own properties, and their rental income is distributed among investors. In developed markets, REITs enjoy special tax considerations. For investors, they offer high dividend, along with a liquid option, to invest in real estate.

The government, in its Budget last year, had unveiled proposals to encourage REITs and Infrastructure Investments Trusts. While several developers have shown interest, no REIT is listed in India, partly because of lack of clarity on taxation.

"A large quantum of funds is locked up in various completed projects which need to be released to facilitate new infrastructure projects to take off," Jaitley said on Saturday while presenting the Budget. The sponsors can list REITs by paying securities transaction tax, he said.

Some of the developers who may benefit are DLF, Embassy Property Developments, RMZ Corp, K Raheja Corp and Unitech.

"Promoter-level capital gains tax on migration to REITs has been rationalised, which should kick-start the REIT industry , although minimum alternate tax on the migration to discourage promoters may immediately initiate the process," said Bhairav Dalal, associate director, tax & regulatory , PwC India.