India might soon see the launch of REITs (Real Estate Investment Trusts) as developers and investors alike are quite enthusiastic following government's relaxation of norms on minimum alternate tax (MAT).
According to the experts tracking the sector, MAT was one of the biggest hurdles in the way of REITs and now many players will start reviewing their plans on this, which got stuck earlier due to taxation issues including MAT.
Yesterday, the Finance Minister Arun Jaitley said MAT will not be applicable on notional book gains, arising from exchange of shares in SPV with unit of trusts in Infrastructure and Real Estate (REITs/InvITs).
Country's largest real estate player DLF, K Raheja, Supertech, Phoenix Malls and private equity players including Blackstone have been planning to launch REITs but were waiting for clarity on various taxation issues.
Applicability of capital gains and MAT on exchange of units against shares of SPV at the time of set-up for REITs had remained one of the biggest hurdles in the launch of these investment vehicles.
Ashok Tyagi, CFO, DLF Group Ashok Tyagi said,"This decision removes the major policy hurdle and will give a significant boost to the establishment of these trusts. This coupled with the recently announced Capital Gains Tax exemption at the hands of the Sponsor and other fiscal incentives to the investors will make Infrastructure and Real Estate trusts far more viable and attractive."
"DLF has already announced its intent to pursue REITs and DLF is committed to set up its first REIT within this year itself consequent to receipt of all necessary approvals. These trusts provide a huge opportunity for unlocking capital," he said.
"In the Budget this year, the capital gains aspect for such a transaction, but MAT had continued to apply. This did not stand to reason because the gain is notional as cash gets generated in the transaction. This amendment is a great relief to REITs as the tax will be levied only when the units of the REITs are sold," Rahul Jain, Partner, Nangia & Co, said.
He also expects to see the launch of REITs in the country this year itself.
However, he also said removing dividend distribution tax (DDT) would have augured well for REITs.
Dividends paid by an SPV to holding REIT attract DDT of 15 per cent, according to Jain. Subsequent distribution of income by the REIT in turn will be subject to TDS at the rate of 10 per cent for resident unit holders and 5 per cent for non-resident unit holders. Further, such income will be taxable in the hands of the individual unit holders as well. The aggregate tax effect shall be considerably high resulting in low yield, which may act as a deterrent to investment in REITs.
The Government could have done well to keep REITs out of the ambit of DDT especially when an REIT is required to distribute 90 per cent of its lease rental income to the unit holders, he said.
REITs are similar to mutual funds, which can be listed and traded on stock exchanges. These have to distribute a majority of their income as dividends. In Budget 2015-16, the finance minister exempted capital gains for sponsors at the time of listing of these units and gave a pass-through of rental income on assets held by REITs to unit holders.
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