The very act of setting up a REIT requires a sponsor to contribute assets (either directly to the REIT or shares of an SPV that owns immovable property into the REIT). Any such contribution, under the current law, will mean a capital gains tax incidence of at least 20% on the difference in value between the holding cost and the transacted fair market value in terms of contribution to the REIT. The industry has lobbied hard to the Finance Ministry that such a tax incidence on contribution will be a non-starter, as it would entail a 20% outflow in order to do an IPO and a liquidity element of at least 20% will be required just to pay taxes. Experts on our call opined that the Finance Ministry is coming around to the view that the contribution of assets or contribution of SPV shares into a REIT should be treated as restructuring and hence, should be tax exempt.
Secondly, any income generated at the SPV level or property income at a trust level is subject to corporate tax and a dividend distribution tax in order to upstream income and be distributable to unitholders.
The industry is seeking a zero-tax regime on the grounds that: (a) income stands distributed to unitholders and unitholders, depending on their character, may or may not be taxed; and (b) being a new investment product, the REIT, as an investment instrument, needs a fiscal impetus. Whilst zero-taxation is the ask, our
experts felt that the Finance Ministry may agree to a single point of taxation but it may not be in a position to provide complete exemption.
Whilst these tax concessions impose a minimal cost on the exchequer, our experts opined that the benefits to the Government and the economy, in the form of foreign inflows, comfortably outweigh the implicit costs. REITs will not only attract foreign inflows that positively impact the economy’s current account deficit but also channel household savings towards investment in REITs (as against the current habit of Black Money Investment in Physical Gold and Real Estate Assets)
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