The draft schemes of Real Estate Investment Trusts and Infrastructure Investment Trusts were announced by the Securities and Exchange Board of India more than a year back. However, it was known that unless the required pass through status for taxation is granted under the tax laws, the schemes cannot take off. To address the income tax issues, the Finance (No.2) Act, 2014 had amended the Act to introduce a special taxation regime in respect of the such schemes referred as `Business Trusts’ in the Act. However, the said provisions were falling short of complete pass through and rightful expectations.
The proposed amendments in this Finance Bill would address some of the limitations. The limitations
which remain to be addressed are also discussed later in this article which should form a part of the
post budget memorandum.
The existing definition of Business Trust in Section 2(13A) is now being substituted to mean a trust registered as an Infrastructure Investment Trust under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 or a Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 in either case made under the Securities and Exchange Board of India Act, 1992, and the units of which are required to be listed on recognised stock exchange in accordance with the aforesaid Regulations.
Under the existing provisions, the listed units of a business trust, when traded on a recognised stock exchange, are subjected to securities transaction tax and the resultant gains are granted special tax treatment, that is to say, if the gains are long term, the same are exempt u/s. 10(38) and if gains are short term, the same are taxable at concessional rate of 15% u/s. 111A. However, this special tax treatment under Section 10(38) and 111A is not available to the sponsors when they transfer units acquired earlier in exchange of shares of the special purpose vehicle (SPV).
One of the ways by which a business trust may indirectly hold income generating assets is through SPV. Taxation of capital gains arising to the sponsor at the time of exchange of shares in SPV, with units of the business trust, is deferred as such exchange is treated as not transfer under Section 47(xvii).
Further, by virtue of Section 49 (2AC), the cost of the shares to the sponsor becomes the cost of these units that the sponsor receives and by virtue of Section 2(42A) Explanation 1 clause (hc), the holding period of shares is included in computing the holding period of such units.
In case the sponsor holding the shares of the SPV decides to exit through the Initial Public Offer (IPO) route, then the special tax treatment on capital gains arising on transfer of shares is available. However, such special tax treatment is not available to the sponsor at the time it offloads units of business trust acquired in exchange of its shareholding in the SPV through the Initial offer at the time of listing of business trust on stock exchange. Thus, tax on such gains is levied at the time of transfer of units by the sponsor and the special tax treatment is presently not available and the transfer is not subjected to STT.
Now, it is proposed to do away with this dichotomy and provide parity between the sponsor held units and the units held by other unit holders.
It is therefore proposed that the sponsor would get the same special tax treatment on offloading of units under an Initial offer on listing of units as it would have been available had he offloaded the underlying shareholding through an IPO and such transaction would also be subjected to STT. To achieve the purpose, Section 10(38) and Section 111A are proposed to be amended so as to omit the second proviso to Section 10(38) and second proviso to Section 111A and the Finance Act, 2004 with reference to STT is also being amended. Thus, benefit of Section 10(38) and Section 111A would be available to all the unit holders at parity. Another issue being addressed by the Finance Bill, 2015 is in respect of the rental income earned directly by the REIT. In the present scheme of investments by REIT, the predominant income of the REIT would be rental income.
For the rental income, the REIT may invest in the property through SPV or may invest directly in the property. If the investment is made through SPV, then the REIT will get income from the SPV in the form of dividend or interest.
Dividend income from the SPV gets exemption u/s. 10(34) while the interest income is exempt in the
hands of business trust u/s. 1010(23FC). However, if the REIT earns rental income from the property
directly held by it, there is no exemption provision for such rental income in the hands of REIT. Now,
to remedy such discrimination, it is proposed to introduce clause (23FCA) in Section 10 to provide that any income of such a business trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt. Consequential amendment is being made in Section 194I to provide that the payer of such rental income to the business trust will not be required to deduct tax at source from 01-06-2015.
The rental income would ultimately reach to the unit holders. Such rental income along with other incomes of the REIT would be received by unit holders in the form of dividend. However, in view of the specific provisions contained in Section 115UA such income would retain its character as rental income and would be taxed accordingly in the hands of the unit holders. Provisions of Section 10(23FD) are being amended to make such rental income taxable in the hands of the unit holders. REIT would therefore effect TDS u/s. 194LBA on such rental income while paying it to the unit holders with effect from 01-06-2015.
The proposed amendments would certainly make the scheme of REIT viable but it is submitted that for the scheme to really become attractive, there is a need to provide tax holiday for initial years on transfer of completed projects by the sponsor to the SPV. Presently, a completed project may not be held by SPV. Under the existing provisions, transfer of such project by the sponsor to the SPV would attract tax under the normal provisions in addition to heavy burden of stamp duty under the relevant State laws and registration charges. Stamp duty being a State subject, it would be left to the States to attract REITs and REIT projects by providing necessary incentives.
Further, in advanced countries the renting is attractive for the reason inter alia that rent laws fully recognise property rights of the owners. In our country, a lot needs to be done in this context in terms of laws as well as in terms of implementation thereof. Further, in advanced countries, it is attractive to hire a property than buy it due to comparative interest and rental rates. In India also such comparatives make hiring attractive. But in India, buying a property i still a preferred option compared to hiring, for the reason that due to shortage of supply vis-a-vis the demand, the appreciation rates in property prices are quite high
CA. Tarun Ghia