Centre softens tax on REITs, InvITs distributions

March 24, 2023

Lobbying by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to rollback tax on distributions in the form of capital repayment has paid off to some extent.

In one of the major amendments to the Finance Bill 2023, passed on Friday, the tax impact on REITs and InvITs was softened with only a portion of such distributions being taxed in the hands of investors.

Budget proposal

On February 1, the Budget had proposed taxing such distributions in their entirety, at the marginal tax rates in the hands of unitholders. REITs and InvITs make distributions to their unit-holders in the form of interest, dividends, and rental all of which are pass-throughs and are taxed in the hands of unit-holders. A fourth way through return of capital were neither taxed in the hands of the trusts nor the unit-holders.

Under the amended laws only a portion of such distributions or a ‘specified sum’ will be taxed. The specified sum is arrived at after taking out the cost of acquisition from the distributed amount.

If a REIT or InvIT had an issue price of ₹100 and in 2024, the amount distributed (as capital repayment) was ₹20, there will be no tax on this since it is lower than the issue price. If in future the trust’s cumulative distribution becomes ₹110, then ₹10 is taxed in the hands of the unitholder. If in the subsequent year the amount increases to ₹130, then tax will be on ₹20, since tax has already been paid on ₹10 in the previous year.

Tax treatment

Embassy Office Parks REIT, which pays out about 40 per cent of its distribution in the form of repayment of capital, said the modification in tax impact would sustain the attractiveness of REITs as an asset class. “We welcome the recent announcement clarifying the tax treatment for the amortisation of SPV debt component,” said Vikaash Khdloya CEO, Embassy REIT.

Dinesh Kanabar, CEO, Dhruva Advisors, said that while the amendment of taxing only the upside over and above the cost of the units, where no redemption is involved, was welcome the industry’s expectations that it would be treated as long-term capital gains and not other income had not found favour. He said the sector had made multiple representations on this.

A similar view was echoed by Harsh Shah, CEO, IndiGrid. “In-sync with the spirit of the distribution methodology, the adjustment of capital repayment’ component of the distribution per unit against cost of acquisition will help in bringing the much-needed clarity on taxability of distributions,” he said.

But, he added that alignment to the LTCG treatment for business trusts, concurrent with equity instruments, would have been better in increasing liquidity and mobilising greater capital in the Indian infrastructure sector.

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