The Finance Act (No.2), 2014 and the recent, Finance Act, 2015 clearly spelled out tax treatment of all possible streams of income for all parties associated with a REIT which paved the way towards introducing an internationally acclaimed investment structure in India. More than 30 countries around the world have established REIT regimes, with more countries in the work. Let us understand the REIT regime in its true sense.
What is REIT?
Simply stated, REIT is similar to a mutual fund that invests in real estate properties which yield rent. It allows both small and large investors to acquire certain part of a property. REIT is a trust which pools in capital from many investors and invests the capital in income producing real estate.
Parties associated with REIT:
1. Trustee: A trustee oversees the activities of REIT. The trustee should be registered with SEBI as a debenture trustee and must be independent from other parties associated with REIT.
2. Sponsor: Sponsor is responsible for setting up of REIT and appointment of trustee. The sponsor(s) should collectively hold 25% in REIT for atleast 3 years and 10% thereafter.
3. Manager: Manager manages assets and investments of REIT and is responsible for operational activities of REIT. Manager should be a company or LLP or body corporate incorporated in India.
Typical REIT structure in India:
a. Securities and Exchange Board of India (SEBI) Guidelines:
Initially proposed in 2008 by the SEBI, the SEBI (Real Estate Investment Trusts) Regulations, 2014 were notified on September 26, 2014. Some key aspects of the regulations were:
b. Income-tax implications:
The Finance Act, 2015 brought about a much needed clarity on various tax implications relating to REIT. Also, a pass through status has been give to REIT’s for rental income which is a staunch move towards simplified and optimistic tax regime in India. Let us understand tax implications relating to various streams of income of a REIT and parties associated with REIT.
|Sr. No.||Transaction||Party to the transaction||Tax impact in the hands of party|
|a.||Transfer of shares of the SPV to a REIT in exchange of REIT units||Sponsor||No capital gain|
|b.||Disposal of REIT units under an IPO listing or sale on stock exchange thereafter||Sponsor||LTCG – holding > 36 months – exempt|
STCG – holding < 36 months – 15%
|c.||Sale of REIT units on stock exchange||Unit – holder||LTCG – holding > 36 months – exempt|
STCG – holding < 36 months – 15%
|a.||Rental income received by REIT||REIT||Exempt – no tax to be withheld by the payer|
|b.||Rental income distributed by REIT||Unit – holder||Taxable – tax to be withheld at 10% for resident and at applicable rates for non-resident|
|a.||Dividend income received by REIT from SPV||REIT||Exempt – as DDT paid by distribution company|
|b.||Dividend income distributed by REIT||Unit – holder||Exempt|
|a.||Interest income paid by SPV||REIT||Exempt|
|b.||Interest income distributed by REIT||Unit – holder||Taxable – tax to be withheld at 5% for non-resident and 10% for resident unit – holders|
Facts state that India has a rent yielding office inventory to the tune of 425 million sq. ft. valued in excess of USD 52 billion which shows that REITs have tremendous growth opportunities. Apart from this, there are other properties like warehousing, retail malls, shopping centers, school buildings, etc. which could be considered for REIT. REITs could enable even a small investor to own certain part of a huge property which earlier, was not possible. Also, since REITs shall be governed by the SEBI regulations, a greater transparency and accountability could be expected in the real estate sector in India.
Further, due to the recent tax clarifications given by our finance ministry, it is certain that a conducive investment climate shall be created in India in favor of REITs.
Points to ponder over: