The real estate industry is keenly waiting for clarity on the tax structure applicable to real estate investment trusts, or REITs, from the upcoming Budget. In July, finance minister Arun Jaitley in his Budget speech gave a so-called “pass through” status to REITs. However, the explanatory statement accompanying the 2014-15 Budget revealed that the tax incentive given to REITs comes in with riders.
The pass through treatment is essentially accorded when REITs are acting as a debt-raising instrument. For instance, if a sponsor, or SPV, has formed a REIT to raise funds either in a foreign or domestic market through bonds or loans, the trust will deduct a witholding tax, before repatriating the interest income to investors. So, while the tax is paid by the trust, the tax liability is that of the investor, and not the SPV or the REIT.
“The special tax regime says that no tax is levied on interest income received from the SPV in the hands of the trust and no withholding tax is levied at the level of SPV. Withholding tax is levied on payments of this interest income to unit holders at 5% for non-resident unit holders and at 10% for resident unit holders,” Pranay Bhatia, partner at BDO India, explained.
However, if an SPV is distributing dividend on equity to the trust (which in turn will repatriate to the investor), it will be subject to dividend distribution tax at the SPV level, but exempt in the hands of the trust and the unit holders.
Also, REIT units, when traded on the stock exchanges, would attract a similar tax treatment as equities, and will be liable for securities transaction tax. While REITs will be exempt long-term capital gains tax, they will attract short-term capital gains tax of 15%.
REITs will also attract minimum alternate tax. So, while swap of shares for units in REIT are not taxable in case of promoter, according to accounting practices, the difference between the fair value of REITs and the cost of shares will be credited to the profit and loss account, leading to a MAT levy of 20% under the I-T Act.
However, the REIT itself will only be taxed in case the assets it holds are transferred to another REIT. Capital gains at the time of sale of assets by the business trust will be taxable in the hands of the trust at the applicable rate. If such capital gains are distributed, the component of distributed income attributable to the capital gains would be exempt in the hands of the unit holder.
The realty sector is expecting that the Budget will exclude both DDT and MAT levies on the REIT structure and exempt it from multiple tax levels, bringing in a level-playing field for more investors.