An internationally accepted concept, introduced in India in 2014, the Real Estate Investment Trust (REIT), is a platform which enables all kinds of investors, including retail and institutional investors, to come together and pool their funds in a trust structure and invest such funds in a diversified real estate portfolio to earn stable and regular returns.
Low entry-level investments, liquidity, stable income generation, capital appreciation, flexibility of exit and transparency are some of the benefits to look for in the platform. REITs’. If successful, it can transform the fragmented real estate sector in India.
Regulators have brought out significant and meaningful amendments in the REIT framework in the recent past to make it a success.
Stock market regulator Sebi has relaxed the regulations by allowing a two-tier holding structure for REITs, removing the limit on the maximum number of sponsors and expanding the definition of real estate property.
Despite the numerous benefits it offers and the recent relaxations, until today India has not benefited from any REIT listings. Success of REITs is a derivative of the yields that the investors expect, which in turn is integrally linked to the tax leakage the cash flows of the REIT may suffer from.
Globally, from a taxation perspective, REITs, are seen as pass through entities and the tax incidence arises when the income is distributed by the REITs to the unit holders. Along these lines, the Union budget 2016 exempted distribution of profits by the project companies to REITs from DDT, albeit the benefit of exemption is available only in case of direct distributions to REITs and not where the assets are held in a multi-layered structure under the REIT.
Post relaxation of Sebi regulations permitting REITs to hold assets under a multi-layered structure, industry players expected the finance minister to announce the proposals to align the tax treatment.
Given that regulatory relaxations were announced closer to the budget, it appears that the finance minister could not make the corresponding tax announcements in his speech and may take it up separately during the year.
There is a proposal to extend the levy of 10 per cent tax on dividend income for all taxpayers except domestic companies and specified charitable trusts and institutions.
Though the intention seems to be to exclude entities/institutions that are exempt from taxation, a specific mention of REITs, should be made in the list of exclusions, else it could result in an additional tax being levied on dividends received by REITs as well!
Swapping of assets by the developer into REIT is exempt from tax, where the assets are held in separate project companies.
The scope of exemption at this stage is limited and where the developers own more than one project in a company, segregation of the REIT-able property and swap into the platform by the developer, trigger both income tax and stamp duty implications.
Also, if the project is owned in partnership, the exemption is not available to swap of such partnership interests. This makes the migration inefficient since the developer would have a tax incidence without an actual liquidity event.
Finally, the taxation laws continue to accord a differential treatment to listed companies and REITs. For instance, the period of holding of listed equity is 12 months as against 36 months for units of a REIT.
Similarly, the carry forward of tax losses of a listed company is not impacted on change of majority ownership of such companies. It is time that parity in tax treatment be provided to REITs with listed companies in India.
Rather than taking small steps, it is time for the finance minister to addresses some of these fundamental asks of the sector in one shot.
It is imperative to facilitate much-needed migration of developers and existing investors from stabilised assets to a REIT framework, for the sector to see the much-awaited liquidity from a new class of investors.
Needless to say that with all the enabling factors in place and relaxations that we expect to see on the tax front, we are positive that the market for REITs will witness considerable growth in the near future.
(The writer is – Partner M&A Tax, PwC. With inputs from Kunal Jain – manager and Khyati Aggarwal – associate M&A tax, PwC)