Taxation of Business Trust in India

In my last article I have discussed ‘Concept of Business Trust in India‘; In this article I am going to discuss Taxation of Business Trust in India. Concept of Business Trust was introduced vide Finance Act, 2014. The Finance Act, 2014 has put in place special taxation regime in respect of Business Trust. The tax structure of the Business Trust as explained in the Finance Act, 2014 is as follows:

Income of Business Trust

• Earns dividend on Shares of SPV
• Earns Rental Income from Properties
• Earns Interest on Loans to SPV
• Earns Capital Gain on Transfer of Assets of Business Trust

Exemption of Income of Business Trust

Section 10(23FC)

any income of a business trust by way of—

(a) interest received or receivable from a special purpose vehicle; or

(b) dividend 30[referred to in sub-section (7) of section 115-O].

Explanation.—For the purposes of this clause, the expression “special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration;

Section 10(23FCA)

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.

Explanation.—For the purposes of this clause, the expression “real estate asset” shall have the same meaning as assigned to it in clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

As per clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 “real estate assets” means properties owned by REIT whether directly or through a special purpose vehicle;

Analysis

• Interest income as referred to in section 10(23FC) and rental income as referred to in section 10(23FCA) is exempt in the hands of Business Trust.
• Long Term Capital Gains shall be taxable at the rate of 10% (plus applicable surcharge and cess) in hands of a non-resident unitholder and 20% (plus applicable surcharge and cess) for resident unit holder. (Please note the holding period should be more than 36 months)
• The short term capital gains be taxed at the rate of 30% (plus applicable surcharge and cess) for residents and 40% (plus applicable surcharge and cess) for non-resident corporates.
• Dividend received by Business Trust will be exempt in the hands of business trust u/s 10(34).
• As per section 115UA (2), Other Incomes of Business Trust shall be taxable at the maximum marginal rate i.e. 42.7%.

Illustration: A Business Trust earns following Incomes:

Interest Income from SPV Rs. 10 Lakh, Long term capital gain on sale of real estate properties Rs 20 Lakh, Dividend of Rs. 30 Lakh from SPV.

Treatment in hands of Business Trust-

• Interest Income of Rs. 10 Lakh is exempt u/s 10(23FC).
• LTCG of RS. 20 Lakh on sale of real estate properties will be taxable u/s 112.
• Dividend of Rs. 30 Lakh will be exempt u/s 10(34).

Taxability of Business Trust

•  Interest income is exempt u/s 10(23FC).
• Rental Income is exempt u/s 10(23FCA)
• LTCG/STCG is taxable u/s 112/111A or MMR as the case may be.
• Other Income Taxable at MMR.

Income of Unit Holders Business Trust

Business Trust→ → → → Distributes Its Income To → → → → Unit Holders

Exemption of Income of Unit Holders

Section 10(23FD)

any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to [in sub-clause (a) of clause (23FC)] or clause (23FCA);

Analysis

• As per section 115UA (1), any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.
• Any distributed income, received by a unitholder from the business trust, other than interest income and rental income (i.e. rental income earned directly by a REIT) would be exempt from the total income of the unitholder.
• As per Amendment in Finance Act, 2020, Now dividend income distributed by the business trust to the unitholders, would also be subject to taxation in the hands of the unitholders with effect from April 1, 2020. It is subject to TDS @ 10%, However, in case of non-residents, any lower rate as may be provided in the DTAA. But there are some concessions which are provided. The summary of the same is as under:

A] If the SPV has exercised the option to pay corporate tax under the 22% corporate tax as per section 115BAA, then 10% withholding tax applies on income in the nature of dividend distributed by the trust to the unit holder and Such dividend income is taxable in the hands of the unit holder.

B] If the SPV has not exercised the option of new tax regime and continue with the old tax regime then No withholding tax applies on income in the nature of dividend distributed by the trust to the unit holder and Such income is exempt in the hands of the unit holder.

• Short term capital gain in the hands of unit holder on transfer of a short term capital asset, being units of business trust on sale of which STT is paid is taxable at the rate of fifteen percent as per section 111A.
• Long term capital gains arising in the hands of unit holder on transfer of long term capital asset, being units of business trust on sale of which STT is paid are taxed at the rate of 10% (plus applicable surcharge and cess) on gains exceeding Rs 1,00,000.

Illustration: A Business Trust earns following Incomes:

Interest Income from SPV Rs. 10 Lakh, Long term capital gain on sale of real estate properties Rs 20 Lakh, Dividend of Rs. 30 Lakh from SPV.

Business Trust distributes Rs. 30 Lakh to its unit holders. One unit holder, Mr. Tarun receives Rs. 30,000 from Business Trust.

Option 1: SPV has opt for New Tax Regime u/s 115BAA

Option 2: SPV has not opt for New Tax Regime u/s 115BAA

Treatment in hands of unit holder, Mr. Tarun –

Option 1

• As per section 115UA (1), any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.
• Amount attributable to Business Trust’s Interest Income= 30,000*10, 00,000/60, 00,000= Rs. 5,000. Such interest income is taxable.

• Amount attributable to Business Trust’s Long Term Capital Gain=30,000*20, 00,000/60, 00,000= Rs. 10,000. Such LTCG is Taxable at 10% (plus applicable surcharge and cess) since the gains are more than Rs 1,00,000/-.
• Amount attributable to Business Trust’s Dividend Income= 30,000*30, 00,000/60, 00,000= Rs. 15,000. Such dividend is taxable since SPV has opt for new tax regime.

Option 2

• As per section 115UA (1), any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.
• Amount attributable to Business Trust’s Interest Income= 30,000*10, 00,000/60, 00,000= Rs. 5,000. Such interest income is taxable.

• Amount attributable to Business Trust’s Long Term Capital Gain=30,000*20, 00,000/60, 00,000= Rs. 10,000. Such LTCG is Taxable at 10% (plus applicable surcharge and cess) since the gains are more than Rs 1,00,000/-.
• Amount attributable to Business Trust’s Dividend Income= 30,000*30, 00,000/60, 00,000= Rs. 15,000. Such dividend is Exempt since SPV has opt for old tax regime.

Capital Gain in Hands of Unit Holders Who Acquired Units in Consideration of Transfer of Shares of SPV

• As per section 47(xvii), any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor shall not be regarded as transfer. Hence, no capital gain shall arise in the hands of shareholders of SPV at the time of exchange of shares of SPV with units of Business Trust.
• As per proviso to section 111A, provisions of section 111A shall not apply in respect of any income arising from transfer of units of a business trust which were acquired by the assessee in consideration of a transfer as referred to in clause (xvii) of section 47.Thus, such short term capital gain shall not be taxable at the rate of 15% but shall be taxable normal tax rates in the hands of assessee.
• As per proviso to section 10(38), provisions of section 10(38) shall not apply in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in clause (xvii) of section 47.Thus, such long term capital gain shall not be exempt but shall be taxable at the rate of 20% as per section 112.

Illustration: Shareholders of SPV transferred shares in SPV to business trust in consideration of Units of Business Trust.

• Such transfer will be exempt in the hands of shareholder as per section 47(xvii) and will be taxable at the time of transfer of units of business trust by shareholders. Benefit of section 111A and 10(38) will not be available at the time of transfer of units of business trust by shareholders of SPV.

Taxability Of Unit Holders

• Interest Income and Rent Income exempt in hands of business trustis taxable in hands of Unit holders.
• Dividend is exempt In the hands of Business trust but in hands of unit holder it will be depends upon the option opt by SPV as discussed above.
• Other distributed income by business trust exempt in hands of unit holders u/s 10(23FD)
• Capital gain arising on transfer of units of Business trust is taxable as per provisions of Section 111A and Section 10(38).