No DDT for real estate investment trusts
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A relief for potential investors in real estate investment trusts (REITs) has proposed a tax pass-through status for dividend income for investors. This comes through in the form of an exemption from dividend distribution tax (DDT) for REITs.
REITs are income producing real estate investments under one trust. The investments are backed by physical assets and income arising through these assets is distributed on a regular basis to investors. In 2014, Securities and Exchange Board of India cleared the norms for launching REITs. Although these haven’t been launched in India, the pass-through status will help in taking this further.
REITs earn rental income from the properties held by it and this in turn is passed on to investors as dividend income. Under the Sebi regulation, REITs can own a property directly or own a Special Purpose Vehicle (SPV), which in turn owns the property. So far, the dividend distributed by the SPV was subject to distribution tax. In case of REITs, as per regulations, the SPV and the trust have to distribute 90% of their income.
In order to further rationalize the taxation of REITs and their investors, the budget has proposed an exemption from DDT for distributions made by SPV to the business trust and such dividend received shall not be taxable in the hands of the investors as well.
According to Gautam Mehra, tax leader–PwC India, “This is a bold and positive decision. For REITs on the tax front, the key irritant is removed. We should now see some movement in registrations and pick up in interest.”
The proposal further details that the exemption holds for cases where the trust holds 100% of the share capital of the SPV and dividends are paid out of the current income rather than accumulated income.
Although this move brings clarity to the taxation of REITs, more may be needed to give a push to the investment vehicle.
Gulam Zia, executive director, Knight Frank India, said, “This is another step in the right direction and it was long pending. But it may not be good enough to kick-start investments. There are other issues like bearing stamp duty on properties and so on which need to get addressed. Some of these issues are beyond the purview of the central government and it remains to be seen how they get resolved.”
Asset owners are ready with commercial properties which can form a part of REITs as income generating assets. For retail investors, access to investments in such properties is limited at the moment but these make for good long-term income generation. This is where the appeal for REITs comes in.
Zia said, “Over the last decade and a half, developers (commercial real estate) have been putting assets on a platform which will be able to align with REITs and give them an exit. This is a good inventory for when REITs are ready to be launched.”
At the moment, from a taxation perspective, the path has been ironed out and the pass-through status means that investors don’t have to worry about any additional tax imbedded in the structure.
Hemal Mehta, partner, Deloitte Haskins and Sells LLP, said, “This was the only fiscal benefit left to be given to investors as it was affecting the structure of REITs and returns to investors. Now that this is done, fund managers will have to consider the commercial aspects of the investment to take up the opportunity.”
In India small savings investments currently give 8-8.5% per annum. REITs, which are long-term income producing investment, will have to give something higher to be worthwhile.