Taxing investor on dividends will hurt REIT, InvIT funding

‘Move will dampen sentiment of foreign investors’

February 03, 2020 10:39 pm | Updated 10:47 pm IST - Lalatendu Mishra

The proposal in the Union Budget to tax dividend in the hands of unit holders/ investors would hurt future InvITs and REITs, say real estate and infrastructure industry officials and analysts.

A team of industry executives is planning to meet Finance Ministry officials in New Delhi on Tuesday in this regard.

Calling for a roll-back, they said such a decision is contrary to the government’s move to encourage InvITs and REITs to provide tax stability to long-term infrastructure investors.

Uncertainty in the tax regime would hurt the sentiment of foreign investors who are already wary of the stability of tax regime in India, they added. The resultant tax burden on the part of investors will put at risk plans for raising about $100 billion with regard to INVITs and REITs, they said.

Till this Budget, business trusts in India had a single level of tax at source, or the corporate tax paid by the special purpose vehicles (SPVs) that owned the assets. The SPVs paid tax only on their annuity income.

Under the provisions of the Income Tax Act, no dividend distribution tax is now chargeable on any amount declared, distributed or paid by a 100% SPV by way of dividends (whether interim or otherwise) to a business trust out of current income.

Bobby Parikh, founder, Bobby Parikh Associates said the REIT / InvIT taxation framework was designed to provide a taxing outcome where income would effectively be subject to one level of tax.

But following the Budget announcement, resident unitholders may be liable to tax in such income at rates that could go up to 43% while non-resident investors may be liable at rates that could go up to 20%.

“This tax was levied on the income of the asset-owning SPV; after-tax profit, distributed by the SPV to the REIT / InvIT and by the REIT / InvIT to the investors were tax exempt. This was achieved by exempting dividend distributions by the SPV from DDT and by further exempting the REIT / InvIT and the investors from tax in such income distributions from the SPV,” he said.

“But the 2020-21, Budget seeks to replace DDT with the more conventional method of taxing dividends. As a result, DDT has been abolished; instead, shareholders are now taxable on dividend income that they receive at applicable rates. This taxing framework is also proposed to be applied to REITS / InvITs,” he added.

“Accordingly, the Budget provisions would now operate such that the SPV will pay tax on its income (the first level of tax, as was the case under the existing law); dividends distributed by the SPV will not attract DDT; the REIT / InvIT would be exempt from tax on such income; but the unitholders would be liable to tax on such income distributed by the REIT (resulting in a second level of tax),” he said.

“All of this would be incremental tax as a result of the proposed Budget amendments. This could have a material impact on the effective returns that investors would generate and could affect the attractiveness of REITS / InvITs as investment vehicles / products,” he said.

Under Section 10(23FD) of the ITA, while distributed income in the nature of interest received or receivable from an SPV (which is upstreamed by the InvIT as a pass through entity) is taxable in the hands of the unitholders, income in the nature of dividend is exempt from tax in the hands of unitholders.

Thus, there were no taxes on distribution of dividend income by the SPV to the business trust, and on subsequent distribution by the business trust to the unitholder, analysts said.

Gautam Mehra Partner & Leader, Tax & Regulatory Services, PwC said “While the DDT change is an overall positive structural change which should benefit small shareholders and MNCs, one piece which needs to be relooked at is the increase of tax for InviTs and REITs, especially since there was a separate carve-out from DDT to these players under the existing tax regime.”

Following the changes, the government’s plans to list some InvITs may come under a cloud. Some of the largest government-run infrastructure entities, such as the National Highway Authority (NHAI), Power Trading Corporation, PowerGrid Corp are looking to monetise their road and transmission assets through InvITs and these could be impacted.

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