Budget 2015-16 Taxation Regime for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (Invit)

The Finance (No.2) Act, 2014 had amended the Act to put in place a special taxation regime in respect of business trusts. The business trust as defined in section 2(13A) of the Act includes a Real Estate investment Trust (REIT) or an Infrastructure Investment Trust(InviT) which is registered under regulations framed by Securities and Exchange Board of India (SEBI) in this regard.

The existing tax regime for the business trust and their investors as contained in different sections of the Income-tax Act, inter alia, provides that:-

(i)     The listed units of a business trust, when traded on a recognised stock exchange, would be liable to securities transaction tax (STT), and the long term capital gains shall be exempt and the short term capital gains shall be taxable at the rate of 15%.

(ii)    In case of capital gains arising to the sponsor at the time of exchange of shares in Special Purpose Vehicle (SPV), being the unlisted company through which income generating assets are held indirectly by the business trusts, with units of the business trust, the taxation of gains is deferred.

(iii)   The tax on such gains is to be levied at the time of disposal of units by the sponsor.

(iv)   However, the preferential capital gains regime (consequential to levy of STT) available to other unit holders of business trust, is not available to the sponsor in respect of these units at the time of their transfer.

(v)    For the purpose of computing capital gain, the cost of these units is considered as cost of the shares to the sponsor. The holding period of shares is included in computing the holding period of such units.

(vi)   The pass through is provided in respect of income by way of interest received by the business trust from SPV i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV.

(vii) However, withholding tax at the rate of 5 per cent. in case of payment of interest component of income distributed to non­resident unit holders, and at the rate of 10 per cent. in respect of payment of interest component of distributed income to a resident unit holder is required to be effected by the trust.

(viii)The dividend received by the trust is subject to dividend distribution tax at the level of SPV and is exempt in the hands
of the trust, and the dividend component of the income distributed by the trust to the unit holders is also exempt.

The deferral of capital gains provided to the sponsor of business trust places such a sponsor at a disadvantageous tax position vis-a vis direct listing of the shares of the SPV. In case the sponsor holding the shares of the SPV decides to exit through the Initial Public Offer (IPO) route, then the benefit of concessional tax regime relating to capital gains arising on transfer of shares subject to levy of STT is available to him. The tax on short term capital gains (STCG) in such cases is levied @ 15% and the long term capital gain (LTCG) is exempt under section 10(38) of the Act. However, the benefit of concessional regime is not available to the sponsor at the time it offloads units of business trust acquired in exchange of its shareholding in the SPV through Initial offer at the time of listing of business trust on stock exchange.

In order to provide parity, it is proposed that,-

(i)      the sponsor would get the same tax treatment on offloading of units under an Initial offer on listing of units as it would have been available had he offloaded the underlying shareholding through an IPO.

(ii)    the Finance (No. 2) Act, 2004 be amended to provide that STT shall be levied on sale of such units of business trust which are acquired in lieu of shares of SPV, under an Initial offer at the time of listing of units of business trust on similar lines as in the case of sale of unlisted equity shares under an IPO.

(iii) the benefit of concessional tax regime of tax @15 % on STCG and exemption on LTCG under section 10(38) of the Act shall be available to the sponsor on sale of units received in lieu of shares of SPV subject to levy of STT.

Further, in case of a business trust, being REITs, the income is predominantly in the nature of rental income. This rental income arises from the assets held directly by REIT or held by it through an SPV. The rental income received at the level of SPV gets passed through by way of interest or dividend to the REIT, the rental income directly received by the REIT is taxable at REIT level and does not get pass through benefit.

In order to provide pass through to the rental income arising to REIT from real estate property directly held by it, it is proposed to provide that :-

(i)      any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt;

(ii)     the distributed income or any part thereof, received by a unit holder from the REIT, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such REIT, shall be deemed to be income of such unit holder and shall be charged to tax.

(iii)    the REIT shall effect TDS on rental income allowed to be passed through. In case of resident unit holder, tax shall deducted @ 10%, and in case of distribution to non-resident unit holder, the tax shall be deducted at rate in force as applicable for deduction of tax on payment to the non-resident of any sum chargeable to tax .

(iv)    no deduction shall be made under section 194-I of the Act where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset held directly by such REIT.

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

[Clauses 3, 7, 26, 31, 44 & 45]

NOTE ON RELEVANT CLAUSES OF FINANCE BILL 2015

Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.

It is proposed to substitute clause (13A) of the said section in order to define a “business trust” to mean a trust registered as,–

(i)       an Infrastructure Investment Trust under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992; or

(ii)      a Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, and the units of which are required to be listed on a recognised stock exchange in accordance with the aforesaid regulations.

Clause 7 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.

It is  proposed to amend clause (38) of the said section to provide that any income in the nature of long term capital gain arising from transfer of units of a business trust which were acquired in consideration of exchange of shares of a special purpose vehicle and on which securities transaction tax has been paid shall not be included in the total income of the sponsor.

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016- 17 and subsequent assessment years.

Clause 26 of the Bill seeks to amend section 111A of the Income-tax Act relating to tax on short-term capital gains in certain cases.

The second proviso to sub-section (1) of the said section provides that the provisions of the aforesaid section shall not be applicable in respect of any income arising from transfer of units of a business trust which were acquired by the assessee in exchange of the shares of a special purpose vehicle.

It is proposed to omit the said second proviso to provide that the provisions of the said section shall now be applicable in respect of any income arising from transfer of units of a business trust which were acquired by the assessee in exchange of the shares of a special purpose vehicle.

This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Clause 31 of the Bill seeks to amend section 115UA of the Income-tax Act relating to tax on income of unit holder and business trust.

It is proposed to amend the aforesaid section to provide that the distributed income or any part thereof, received by a unit holder from the business trust, being a real estate investment trust, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such business trust,shall be deemed to be income of such unit holder and shall be charged to tax.

This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Clause 44 of the Bill seeks to amend section 194-I of the Income-tax Act relating to rent.

The aforesaid section provides for deduction of tax at source on payment of any income by way of rent to a resident.

It is proposed to amend the said section by inserting a proviso that no deduction shall be made under the section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.

This amendment will take effect from 1st June, 2015.

Clause 45 of the Bill seeks to amend section 194LBA of the Income-tax Act relating to certain income from units of a business trust.

It is proposed to amend the sub-section (1) of the aforesaid section to provide that where any distributed income referred to in section 115UA, being of the nature referred to in clause (23FCA) of section 10, is payable by a business trust to its unit holder being a resident, the person responsible for making the payment shall at the time of credit of such payment to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates of ten per cent.

It is further proposed to amend the said section to provide that where any distributed income referred to in section 115UA, being of the nature referred to in clause (23FCA) of section 10, is payable by a business trust to its unit holder, being a non-resident (not being a company), or a foreign company, the person responsible for making the payment shall at the time of credit of such payment to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

These amendments will take effect from 1st June, 2015.

EXTRACT OF RELEVANT CLAUSES FROM FINANCE BILL 2015

3. Amendment of section 2.

In section 2 of the Income-tax Act, with effect from the 1st day of April, 2016,—

(a) for clause (13A), the following clause shall be substituted, namely:—

‘(13A) “business trust” means a trust registered as,—

(i) an Infrastructure Investment Trust under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992; or(ii) a Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, and or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

(i)       such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii)      the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”;

(c)      in clause (37A), in sub-clause (iii), after the words “for the purposes of deduction of tax under”, the words, figures and letters “section 194LBA or” shall be inserted;

(d)      in clause (42A), in the Explanation 1, in clause (i), after sub-clause (hc), the following sub-clause shall be inserted, namely:—

“(hd) in the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47, there shall be included the period for which the unit or units in the consolidating scheme of the mutual fund   were held by the assesse;”.

7. Amendment of section 10.

(f) in clause (38), the second proviso shall be omitted.

26. Amendment of section 111A.

In section 111A of the Income-tax Act, in sub-section (1), the second proviso shall be omitted with effect from the 1st day of April, 2016.

31. Amendment of section 115UA.

In section 115UA of the Income-tax Act, in sub-section (3), after the words, brackets, figures and 10 letters “in clause (23FC)”, the words, brackets, figures and letters “or clause (23FCA)” shall be inserted with effect from the 1st day of April, 2016.

44. Amendment of section 194-I.

In section 194-I of the Income-tax Act, with effect from the 1st day of June, 2015, after the second proviso, the following proviso shall be inserted, namely:—

“Provided also that no deduction shall be made under this section where the income by way of           rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real   estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.”.

45. Amendment of section 194LBA.

In section 194LBA of the Income-tax Act, with effect from the 1st day of June, 2015,—

(a)      in sub-section (1), after the words, brackets, figures and letters “in clause (23FC)”, the words, brackets, figures and letters “or clause (23FCA)” shall be inserted;

(b)      in sub-section (2), for the words “being a non-resident, not being a company”, the words and brackets “being a non-resident (not being a company)” shall be substituted;

(c) after sub-section (2), the following sub-section shall be inserted, namely:—

“(3) Where any distributed income referred to in section 115UA, being of the nature referred to in clause (23FCA) of section 10, is payable by a business trust to its unit holder, being a non-resident (not being a company), or a foreign company, the person responsible for making the payment shall at the time of credit of such payment to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.”.
( Compiled Jointly by CA Ankit Gupta and Taxguru Team)

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Category : Income Tax (24760)
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Tags : Budget (1472) Budget 2015-16 (272)

One response to “Tax Regime for Real Estate Investment Trusts and Infrastructure Investment Trusts”

  1. Munendra Singh says:

    how to calculate tds on rent on building, if TDS Amount 185000

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