Unresolved issues in Budget re. REITs holding them back?

From The Financial Express

Real Estate Investment Trusts (REITs) are akin to mutual funds and hence allow large number of small investors to invest into income-generating real estate and thereby generate better returns. The investors get enhanced liquidity coupled with higher returns. The developers also get much needed liquidity as it opens a new source of capital.

Globally, REITs own various kinds of commercial real estate like office space, studio apartments, warehouses, hospitals, shopping centers, hotels, etc. Some REITs also engage in financing of real estate.

According to these SEBI regulations returns of REITs will be derived mainly from rental income and capital gains from real estate.

This rationalisation of the tax regime for REITs in Budget 2016-17 will help make it a reality. Big developers will definitely come up with RIETs to benefit from easier access to capital.

The first set of tax provisions for REITs came in 2014. The existing tax regime for REITs is as follows:

The investors, instead of the REITs, would be subject to tax in respect of interest income received from a Special Purpose Vehicle (SPV) by the REITs. Consequently, the TDS would be 10 per cent in case of distribution of interest income to resident unit-holders and 5 per cent or treaty rates whichever are beneficial in the case of non-resident unit-holders.

Rental incomes received directly by REITs from the asset held by them would be taxed in the hands of the investors only. In case of rental income, TDS for the resident unit-holders shall be 10% and for non-resident unit-holders, it shall be in accordance with the provisions of the Income-tax Act, 1961 or the relevant Double Taxation Avoidance Agreement between India and the country of residence, whichever is beneficial to the investor. Capital gains earned by REITs upon sale of shares in SPV or sale of real estate assets would be taxed at regular rates for capital gains and there would be no further tax in the hands of the unit holders after distribution of the same. Capital gains arising to the unit holders of REITs would be accorded the same treatment as that of listed securities since Securities Transaction Tax (‘STT’) would be applicable to sale and purchase of units of REITs. Capital gain arising at time of swap of its shareholding in SPV for units of business trust is deferred both under normal provisions and from applicability of MAT. Such gains get taxed only after actual sale of units.

As per the existing regime, in case of dividends distributed by the SPV, Dividend Distribution Tax (‘DDT’) was paid and the dividends were not taxable in the hands of REITs as well as the unit holders. Union Budget 2016 proposals have provided for excluding the distribution by the SPV from DDT in case the REIT either holds 100% of equity in SPV or the capital other than what is statutorily required to be held by any other entity.

Some unresolved issues like stamp duty and capital gain tax may prove to a roadblock, but the DDT exemption could turn out to be a game-changer for REITs. For investors, REITs would be a preferred form of asset-backed investment with visible revenue streams and offering adequate protection to investors.

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