How will the budget affect InvITS and REITs?

Sonal Pruthi

13 Feb, 2021

The article discusses the new regime of INVITS and REITS. The terminology INVITS stands for – Indian Infrastructure Investment Trust and REITS- Real Estate Investment Trust. The Indian Infrastructure Investment Trust and Real Estate Investment Trust has drawn investments from some of the largest global institutional investors, sovereign wealth funds and pension funds. It has been statistically drawn that the sum of INVITS and REITS is $3.6 Billion of Capital.

Union Budget 2021-2022- Highlights of INVIT and REIT

This move enables Foreign Portfolio Investors (FPI) to debt finance REITS and INVIT, which are likely to assist cash stressed real estate sector. Our finance minster has remarked that infrastructure is a long term debt financing. It requires professional managed debt financial institution (DFI) to act as a provider for infrastructure financing. The FPI- Foreign Portfolio investors will be able to debt finance the REIT and INVIT. The Union Budget of 2021-2022 has allocated the DFI of Rs.20,000 Crores with an ambition of the lender to have a portfolio of 5 lakhs crores within three years time period. This will allow flow of funds in the real estate and infrastructure projects sector.

Read our article:Major Highlights of the Union Budget 2021-22 (Part-1): Direct & Indirect Tax Proposals

Understanding the concept of INVIT and REIT

The two vehicles are referred to as Business Trust, and it has significant potential in achieving its targets of massive infrastructure development. These regimes were introduced in India recently.

The steps which helped in bring out the regimes are:

1. The income tax law has been amended, recognising business trust as a special purpose vehicle (SPV).
2. Business trust for non resident’s investors has been streamlined. Where the investments were incentivised by providing concessional tax rate @5 per cent.
3. Tax exemption is allowed on dividend distribution by the SPV which were not subject to the dividend distribution tax in the hands.
4. A tax deferral was provided to sponsors contributing shares of the SPV to the business trust in place of the units. Any gain will be taxable when the units are sold and not when the shares are transferred to SPVs.

What are the following changes introduced in the INVITS and REITS?

The changes which have been introduced In the INVETIS and REITS are as follows:

1. Meaning of Business Trust: According to section 2(13) of the Income Tax Act, 1961, a trust can be registered under INVITS and REITS regulations. These are units to be listed in a recognised stock exchange. The bill has proposed the amendment to include the unlisted INVITS registered with SEBI^[1] as well. The capital gains realised on the transfer of units of unlisted private INVIT shall be taxable at 10 per cent in the hands of non-resident tax holder and 20 per cent in the hands of resident tax holder.
2. Dividend Distribution Tax (DDT) replaced with Dividend Withholding Tax– As per section 115 (O), dividend distributed by a domestic company is subject to the dividend distribution tax @20.56% . The dividend income is exempt in the hands of unit holders. At the same time, it is taxable in the hands of non-resident tax holders. According to Section 115 O, when dividend is distributed by the special purpose vehicle, the business trust keeps the entire shareholding, other than which is to be held by the government in it. Such is exempt from the DDT

According to this bill, the new regime does not allow DDT-dividend distribution tax to be discontinued for the unit holders. However, it allows the business trust to be exempt from the tax on dividend income from a SPV.

3. Taxation of Dividend at Business Trust Level– According to section 10(23F), of the Income Tax Act, 1961, exempts certain income of business trust which holds the controlling interest and percentage prescribed under the INVIT and REIT Regulations. The bill proposes no change in the taxation of interest income of a business trust. The bill proposes to exempt the dividend income received from the business trust from a SPV. This would be applicable where the business holds the controlling interest under the INVIT or REIT Regulations.
4. Taxation of Dividend at the Unit Trust Holder Level– According to the section 10 (23FD), any distributed income received by the unit holder from the business trust other than interest income or rental income would come under the REIT regulations. The rental income earned directly by REIT is exempt from the total income of the unit holder. The bill proposes to tax the interest income, rental income and dividend in the hands of unit holders.

5. Application of Dividend Distribution Tax in multi level business

According to the INVIT and REIT Regulations, an INVIT or REIT is permitted to have level holding structure, as the business trust holds the share in the SPV through a holding company. The Income Tax Act does not stop the multi-level structure from the applicability of DDT. The current bill abolishes Section 115O of the Act and introduces the section 80M of the Act .

This section provides for a deduction for dividends received by one domestic company from another domestic company. In light of the above, under the proposed provisions of the Bill, the holding company would be able to claim deduction for the dividends received from the SPV, resulting in reduction of its tax cost.

Conclusion

It can be concluded INVIT and REIT has been amended to increase the flow in the real estate and infrastructure sector. The amendments will help the sector to raise considerable amount of funds.