A relatively new instrument that is slated to emerge in the retail investment segment is the Real Estate Investment Trust or REIT. These Trusts are structured like MFs, except that they are related purely with real estate.
Some of them (REITs) vie for capital gains by buying, developing and selling real estate. Others (InvITs) generate rental income by building and leasing out assets. Both are designed to give the retail investor a return he would receive as if he owned the property directly, but in the ratio of his contribution vis-a-vis the total.
The sponsors (AMC) call for investments from retail investors, enabling them to take exposure to real estate without the need to make the normal large ticket investment. Therefore, a REIT is also an Alternate Investment Fund (AIF) for the real estate industry directly tapping into individual and household savings. This leads to lower costs for realtors, who must otherwise raise money at extremely high interest rates. REITs may be listed and traded like an MF or an ETF.
The existing tax regime provides that —
iii) For computing capital gain, the cost of these units is considered as cost of the shares to the sponsor. The holding period of shares is included in computing the holding period of such units.
The deferral of capital gains provided to the sponsor of business trust places such a sponsor at a disadvantage vis-a-vis direct listing of the shares of the SPV.
For the sake of parity, the recent Finance Act 2015 has now provided that —
iii) the benefit of concessional tax regime of tax @15% on STCG and exemption on LTCG shall be available to the sponsor on sale of units received in lieu of shares.
Further, in case of REITs, the income is predominantly in the nature of rental income. This rental income arises from the assets held directly by REIT or held by it through an SPV. The rental income received at the level of SPV gets passed through by way of interest or dividend to the REIT. The rental income directly received by the REIT is taxable at REIT level and does not get pass-through benefit.
In order to provide pass-through status to rental income arising from real estate directly held by it, now it is provided that —
iii) the REIT shall effect TDS on rental income allowed to be passed through. In the case of Resident unit holder, TDS shall be applied @10%, and in case of distribution to Non-Resident unit holder, the tax shall be deducted as per India’s tax treaty with that country.
But there are heavy dampeners. If the asset is held through a SPV and not directly, DDT will be applicable. The industry was clamouring for removal of DDT, but this wish has not been granted.
Worst, there is no clarity on the minimum alternate tax (MAT). Internationally, there is no MAT or DDT. When assets are transferred to a REIT, holding companies attract MAT on 100% notional gains. The exemptions on capital gains become irrelevant, since the MAT liability is triggered twice — once at the sponsor level, when shares are transferred to a REIT and also when the units of REIT are transferred.
Fortunately, just before the budget proposals were passed by the parliament, a new clause has been inserted to compute the gains from transfer of the units when traded on a recognised stock exchange in India for the purpose of MAT. The gain shall be computed by taking into account the cost of shares exchanged with units or the carrying amount of the shares at time of exchange where such shares are carried at a value other than the cost through P&L account.
Accordingly, notional loss arising from transfer of asset or notional loss arising from change in carrying amount of the units and actual loss from their transfer shall be added back to the book profit for computation of MAT.
