REIT’s taxation gets more clarification
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In the previous year’s Union Budget, the real estate sector was among the most benefited with crucial announcement of pass-through tax status being given for real estate investment trusts (REITs), changes in foreign direct investment in the sector, and tax incentives for home buyers. This year, too, the real estate sector, which has been going through tough times, was expecting a lot. But there was disappointment in store for most of the stakeholders.
The budget has not provided any additional relief to home loan takers by increasing income tax deduction limit or on repayment of housing loans. On these fronts, the changes announced last year, remain unchanged. “This is a disappointment, since there was expectation that the finance minister would further increase either or both of these limits and thereby address the reality of high property prices in India,” said Anuj Puri, chairman and country head, JLL India.
Though the finance minister mentioned the vision of providing housing for all by year 2022, and the vision of having 20 million houses in urban area and 40 million houses in rural area, with basic amenities such as 24-hour water supply, infrastructure, and so on. However, unfortunately, no clarity came forth on how these are going to come up. Puri said, “Since long, there has been a lot of buzz around housing for all, affordable housing and smart cities, but this year’s budget lacked in any pathway to achieving these goals.”
While, retail home buyers may have been disappointed, some further clarity came forth regarding tax implication on REITs and Infrastructure Investment trust (InvIT).
REITs were first talked about in 2008, but it was only in October 2013 that a draft guideline was issued regarding them. But lack of clarity on tax implication on income earned from s, and some other related aspects, were holding back the instruments from becoming reality. There was some headway in last year’s budget to overcome the issues, but clarity on few things remained. The finance minister tried to overcome those issues. As per the current provisions, REITs can only defer the taxation of gains at the time of divestment of units. Hemal Mehta, senior director in India, Deloitte, said, “Now sponsors swapping the shares of a SPV (special purpose vehicle) holding the real estate or infrastructure asset with the units of REIT or InvIT, and subsequently divesting the units on the stock exchange, will be taxed on similar lines as in the case of IPO (initial public offering).” The move will encourage the sponsor to offer more REITs. “This move will create an alternate funding opportunity for sponsors since the tax treatment is on par with raising funds through IPO,” said Mehta.
Amit Bhagat, chief executive officer and managing director, ASK Property Advisors, agrees. “This has been a revolutionary budget for private equity. Pass-through status has been given to AIFs and REITs, which is good for investors,” he said.
Also, the rental income earned on properties directly owned by the REITs will now be considered as a pass-through and will be taxable in the hands of unitholders. Mehta said, “For a resident unitholder, a REIT will be obliged to withhold tax at 10%, but for a non-resident investor, the withholding tax could be in the range of 30-40%, which needs to be determined based on the taxability of the non-resident in India. This amendment may not be beneficial for non-resident investors.”
If the various tax clarifications do lead to REITs coming into existence, it will give a boost to the liquidity situation of real estate developers, who have been struggling for cheaper sources of funds to finance construction activities. It will also be an additional source of investment for those people looking to enhance the real estate part of their portfolios.