The legendary Counsel Shri Soli Dastur recently on 14th July 2014 presented his illuminating analysis of the Direct Taxes proposals of the Finance Bill, 2014 (the recent Budget) at the Lecture Meeting organized by Bombay Chartered Accountants Society (BCAS). The topmost Indian Authority on Direct Taxes, Shri Dastur opened his talk by saying that the New Tax Regime for REITs and InvITs, introduced in the Budget, involves 11 sections and would need a separate lecture by itself, for a complete discussion.
Taking cue, we sat down to take a close look at the proposed New Tax Regime for REITs and InvITs. And what did we find? Contrary to the popular understanding the taxation of REITs and InvITs is not truly pass-through.
a. Losses incurred by REITs and InvITs cannot pass-through to the Investors.
b. Capital Gains realized by the REITs and InvITs (Business Trust) also cannot pass-through to the Investors - such Gains are instead taxable in the hands of the Business Trust itself.
c. And certain other income received by the Business Trust too cannot pass-through to the Investors – such income is taxable in the hands of the Business Trust at maximum marginal rate.
So what incomes can pass-through to the Investors? And in what manner?
In this Analysis of the New Tax Regime for REITs & InvITs, we present to you 33 Questions and Answers covering tax aspects of various transactions that can occur within the framework of REITs &InvITs.
Besides, we also examine - with the help of simple examples - how the proposed provisions of limited pass-through taxation will work in practice. We earnestly hope that you will find this Analysis worthy of your time and attention.
Q1: What is a Real Estate Investment Trust (REIT)?
Ans: A REIT is essentially an investment vehicle. Investors subscribe to Units of a REIT and thus pool together their monetary resources. With the Capital invested by the Investors, a REIT acquires Real
Estate Assets.
REITs primarily invest in completed revenue generating Real Estate Assets. Major part of their investments is in completed properties which provide regular income to Investors.
A REIT may invest in completed Real Estate Assets either directly or through a Special Purpose Vehicle (usually a Company).
Q2: What is the need for Real Estate Investment Trusts (REITs) in India?
Ans: Real Estate sector in India has grown at a rapid pace in recent years. And the operations of Corporate sector too have grown. Such growth has increased the demand for commercial buildings – modern offices, malls, conference centers, warehouses, etc.
A suitable investment vehicle is required for a rapidly growing Real Estate sector in India. REIT provides such vehicle for investment.
Q3: What are the benefits of Real Estate Investment Trusts (REITs)?
Ans: REITs are beneficial to both the Industry as well as the Investors.
Benefits to Industry:
a. REITs provide a means of exit to the Developer of properties
b. By doing so, REITs provide liquidity and enable the Developer to invest in new projects
Benefits to Investors:
a. REITs provide a less risky avenue of investment to the Investors – investing in under-construction properties is more risky
b. REITs provide Investors an avenue to invest in those kinds of properties in which they otherwise would not have been able to take an exposure
c. REITs provides regular income to Investors from the rentals received from properties (in which a REITs has invested)
Q4: What is the current status of Real Estate Investment Trusts (REITs) in India?
Ans: The Securities and Exchange Board of India (SEBI) had proposed Draft Regulations relating to REITs. Those Regulations were placed in public domain for comments. The Final Regulations however are yet to be notified.
Q5: Which other countries have Real Estate Investment Trusts (REITs)?
Ans: Globally the framework for REITs exists in several countries. Important among those are the US, UK, Japan, France, Australia and Singapore.
Q6: What are the salient features of Real Estate Investment Trusts (REITs)?
Ans: REITs generally have the following features:
• REITs are managed by Professional Managers who have skill and experience in property development, redevelopment, acquisitions, leasing and management, etc.
• REITs bring transparency and accountability in the Real Estate Sector
• REITs provide an investment option to long term pools of capital like pension funds and insurance companies – the regular stream of income helps those funds and companies in managing regular outflow to their investors
• Listed REITs provide liquidity – Investors can easily exit.
To view the complete Analysis of the New Tax Regime for REITs & InvITs: Click Here
CAclubindia
