Status quo for investment trusts likely on tax front


NEW DELHI: India is examining whether a carveout can be provided to real estate and infrastructure investment trusts (REITs, InvITs) under the proposed regime for taxation of dividends.

The budget proposes to scrap dividend distribution tax (DDT) and shift the taxation of such payouts to recipients.

Industry has already taken up the issue with the government as it could adversely impact these increasingly popular investment vehicles for the real estate and infrastructure sectors that rely on steady dividend income.

Moreover, sections within the government are also worried that the move could impact its own asset-monetisation plan, especially in the roads sector.

“There have been representations — the issue is being examined,” a senior government official said.

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Two options are under consideration. One is to create a carveout for InvITs and REITs to allow them to continue with the earlier regime of payment of DDT by the entity distributing dividends while there is no tax on the recipient. The second is to shift InvITs and REITs to the new regime but exempt them from taxes on dividends.

A final call would be taken closer to the reply to the Finance Bill, taking into account all pros and cons, the official said.

Investors In a Spot
The Finance Bill proposes to remove DDT at the rate of 15% at the level of the company, making it taxable in the hands of the recipient at the applicable rate. Section 10(23FD) of the Income-Tax Act, 1961, which earlier exempted dividend income received by a unit holder from a business trust, is also being proposed to be amended. Hence, dividend incomes received by unit holders from business trusts will also be taxed in the hands of unit holders.

InvITs and REITs, unlike companies, are structured as business trusts and are therefore bound by law to distribute 90% of their cash flows. This puts them and their investors in a spot, especially as the change comes after the framework for InvITs and REITs was rolled out and have begun to generate interest after much effort. A number of private equity and sovereign wealth funds have invested in these instruments.

The dividends will be taxed as income in their hands and taxed at their marginal income tax rate going up to 30%.

Experts said the taxation regime on REITs and InvITs had reached some level of maturity and acceptance after multiple rounds of deliberation over the years and therefore should be left unchanged.

“It is imperative that status quo is maintained on the same to ensure investments flow into these, as number of such investments/structures are at different stages of implementation, based on the current understanding of the taxation system,” said Vikas Vasal, national leader, tax, Grant Thornton in India.

Vasal pointed that the government is also looking at using these vehicles to monetise infrastructure assets and said that the recent budget proposals should be looked at from the investors’ perspective.

InvITs and REITs were introduced in 2014 but they only took off in 2017 after several tweaks were made following multiple stakeholder consultations.

Also consistent with the global framework, they were provided a single level of taxation. Nearly $3.6 billion has already come through the route and another $5 billion of InvIT transactions have already been announced. These flows are also crucial to the government financing its ?103 lakh crore investment programme.