The budget has proposed the distribution by REITs and InvITs in the form of repayment of debt, will be taxable as other income, in the hands of unitholders at marginal tax rates.
As per the Securities & Exchange Board of India’s regulations, both REITs and InvITs are required to distribute their cash surplus up to certain limits on a quarterly basis. These distributions generally consist of interest, dividend, or repayment of debt.
Distribution of income as dividend by these trusts continues to be exempted from taxation to unitholders, while the interest component was already taxable.
“A meeting between the Ministry of Finance officials and industry executives took place last week and a representation has already been made requesting a relook at the proposal,” said one of the persons mentioned above.
From the next financial year starting from April 1, all distributions by REITs and InvITs representing repayment of debt will be taxable as other income in the hands of the unit holders.
Following the implementation of this tax proposal, the business trusts including REITs and InvITs will need to review mode of their income distribution to unitholders.Tax experts are of the view that the government has tried to bring in parity in taxation of incomes for investors of REIT and InvIT by including the 'repayment of debt' by widening the tax bracket.
In their representation to the finance ministry officials, REITs have highlighted the attractiveness and its steady rise in acceptance by retail investors as an investment product since the first Indian public listing in April 2019. According to them, any disruption with regards to taxation and retail investors’ returns may act as an impediment in development of the market.
The government itself has made a lot of efforts to streamline the structure and regulations to ensure that the REITs market gains depth in India. The capital market regulator SEBI had notified the regulations governing REITs in 2014 and the market has witnessed three listings so far.
For the quarter ended December, Mindspace Business Parks REIT has approved distribution of Rs 284.6 crore. Dividend, which is tax-exempt in the hand of unitholders, formed 91% of this while interest constituted 9%.
Embassy REIT has announced a distribution of Rs 503 crore that included 45% of amortisation of SPV debt. Brookfield India Real Estate Trust’s 50% current distribution also falls under this category.
In India, REITs have witnessed robust investor interest from a diversified investor base of over 1 lakh unitholders, including sovereign and pension funds, domestic mutual funds and life insurers, foreign portfolio investors (FPIs), family offices, high net worth individuals and retail investors.
It has provided investors an opportunity to participate in the growth and value creation of the commercial real estate sector that continues to benefit from the potential and promise of India being a thriving talent pool for global corporates and capability centres.