Scheme for taxation of Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (Invit) [Chapter XII-FA – Section 115UA] :
(i) The SEBI has notified the final regulations relating to two new categories of investment vehicles namely, the Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (Invit).
(ii) The SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) provide a framework for registration and regulation of Real Estate Investment Trusts (“REIT’s”).
| Salient features of the REIT Regulations, as approved by the SEBI:
(a) REITs shall be set up as a trust and registered with SEBI. It shall have parties such as Trustee, Sponsor(s) and Manager. (b) The trustee of a REIT shall be a SEBI registered debenture trustee who is not an associate of the Sponsor/manager. (c) REIT shall invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs). In such SPVs, a REIT shall hold or propose to hold controlling interest and not less than 50% of the equity share capital or interest. Further, such SPVs shall hold not less than 80% of its assets directly in properties and shall not invest in other SPVs. (d) Once registered, the REIT shall raise funds through an initial offer. Subsequent raising of funds may be through follow-on offer, rights issue, qualified institutional placement, etc. The minimum subscription size for units of REIT shall be Rs 2 lakhs. (e) Units of REITs shall be mandatorily listed on a recognized Stock Exchange and REIT shall make continuous disclosures in terms of the listing agreement. Trading lot for such units shall be Rs 1 lakh. (f) For coming out with an initial offer, the value of the assets owned/proposed to be owned by REIT shall be of value not less than ` 500 crore. Further, minimum issue size for initial offer shall be Rs 250 crore. (g) The Trustee shall generally have an overseeing role in the activity of the REIT. The manager shall assume operational responsibilities pertaining to the REIT. (h) A REIT may have multiple sponsors, not more than 3, subject to each holding at least 5% of the units of the REIT. Such sponsors shall collectively hold not less than 25% of the units of the REIT for a period of not less than 3 years from the date of listing. After 3 years, the sponsors, collectively, shall hold minimum 15% of the units of REIT, throughout the life of the REIT. (i) Not less than 80% of the value of the REIT assets shall be in completed and revenue generating properties. Upto 20% of the value of REIT assets shall be invested in following : (1) developmental properties; (2) mortgage backed securities; (3) listed/ unlisted debt of companies/body corporates in real estate sector; (4) equity shares of companies listed on a recognized stock exchange in India which derive not less than 75% of their operating income from Real Estate activity; (5) government securities; (6) money market instruments or cash equivalents. However, investments in developmental properties shall be restricted to 10% of the value of the REIT assets (j) A REIT shall invest in at least 2 projects with not more than 60% of value of assets invested in one project. (k) REIT shall distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to its investors, atleast on a half yearly basis. |
(iii) The SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) provide a framework for registration and regulation of Infrastructure Investment Trusts (“InvITs”).
| The salient features of the InvIT Regulations, as approved by SEBI:
(a) InvITs shall be set up as a trust and registered with SEBI. It shall have parties such as Trustee, Sponsor(s), Investment Manager and Project Manager. (b) The trustee of an InvIT shall be a SEBI registered debenture trustee who is not an associate of the Sponsor/Manager. (c) InvITs shall invest in infrastructure projects, either directly or through SPV. In case of PPP projects, such investments shall only be through SPV. (d) An InvIT shall hold or propose to hold controlling interest and more than 50% of the equity share capital or interest in the underlying SPV, except where the same is not possible because of a regulatory requirement/ requirement emanating from the concession agreement. In such cases, sponsor shall enter into an agreement with the InvIT, to ensure that no decision taken by the sponsor, including voting decisions with respect to the SPV, are against the interest of the InvIT/ its unit holders. (e) Sponsor(s) of an InvIT shall, collectively, hold not less than 25% of the total units of the InvIT on post issue basis for a period of at least 3 years, except for the cases where a regulatory requirement/concession agreement requires the sponsor to hold a certain minimum percent in the underlying SPV. In such cases, the consolidated value of such sponsor holding in the underlying SPV and in the InvIT shall not be less than the value of 25% of the value of units of InvIT on post -issue basis. (f) The proposed holding of an InvIT in the underlying assets shall be not less than Rs 500 crore and the offer size of the InvIT shall not be less then Rs 250 crore at the time of initial offer of units. (g) An InvIT which proposes to invest at least 80% of the value of the assets in the completed and revenue generating infrastructure assets, shall : (i) raise funds only through public issue of units. (ii) have a minimum 25% public float and at least 20 investors. (iii) have minimum subscription size and trading lot of Rs 10 lakhs and Rs 5 lakhs, respectively. (iv) distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to the investors, atleast on a half yearly basis. (v) through a valuer, undertake a full valuation on a yearly basis and updation of the same on a half yearly basis and declare NAV within 15 days from the date of such valuation/updation. (h) A publicly offered InvIT may invest the remaining 20% in under construction infrastructure projects and other permissible investments, as defined in the regulations. However, the investments in under construction infrastructure projects shall not be more than 10% of the value of the assets. (i) Listing shall be mandatory for both publicly offered and privately placed InvITs and InvIT shall make continuous disclosures in terms of the listing agreement. |
(iv) The Finance (No.2) Act, 2014 has introduced a special taxation regime for providing the manner of taxability of –
(1) income in the hands of business trusts; and
(2) income distributed by such business trusts in the hands of the unit holders.
Section 2(13A) defines a business trust to mean a trust –
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(v) Chapter XII-FA, containing the special provisions relating to business trusts, was inserted by the Finance (No.2) Act, 2014 w.e.f. A.Y.2015-16. Section 115UA(1) provides that 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.
(vi) Section 10(23FC) exempts any income of a business trust by way of interest received or receivable from a Special Purpose Vehicle (SPV). Thus, the business trust enjoys a pass through status in respect of interest received or receivable from a SPV.
| SPV means an Indian company in which the business trust holds controlling interest and any specified percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration (not less than 50% as per the current REIT regulations). |
(vii) The distributed income of the business trust, to the extent it comprises of interest referred to in section 10(23FC), is deemed to be the income of the unit holder in the previous year of distribution and subject to tax in the hands of the unit holder in that year. Accordingly, the business trust is required to deduct tax at source on interest component of income distributed to its unit holders.
(viii) Any distributed income referred to in section 115UA, to the extent it does not comprise of interest referred to in section 10(23FC), received by unit holders is exempt in their hands under section 10(23FD).
Illustration
A business trust receives income of Rs 1 crore, comprising of Rs 80 lakh interest from SPV and Rs 20 lakh, dividend from SPV. It distributes ` 90 lakh to its unit-holders. What are the tax implications?
Solution
The proportion of interest and dividend income in the hands of each unit holder would be in the ratio of 8:2. For example, in the case of a unit holder to whom income of Rs 5 lakh is distributed, Rs 4 lakh would constitute interest income and Rs 1 lakh dividend income. Tax has to be deducted by the business trust on interest component of income distributed to unit holders, since the business trust enjoys a pass-through status in respect of such income and the same is taxable in the hands of the unit holder. However, dividend income is exempt both in the hands of the business trust and in the hands of the unit holder, since the SPV would have paid dividend distribution tax under section 115-O on the same.
(ix) Any person responsible for making payment of distributed income on behalf of the business trust to a unit holder is required to furnish a statement to the unit holder and the prescribed authority within the prescribed time.
The statement should be in the prescribed form and manner. It should contain the particulars of the nature of income paid during the previous year as well as the other details as may be prescribed [Section 115UA (4)].
(x) Under section 139(4E), a business trust is mandatorily required to furnish a return of its income or loss in every previous year. All the provisions of the Income-tax Act, 1961 would apply as if it were a return required to be furnished under section 139(1).
(xi) The scheme of taxability of income in the hands of the business trust, unit holders, sponsors etc. is briefed in the table given hereunder –
| Transaction | Section | Tax and TDS implications | |
| (1) | Transfer of listed units of the business trust by the unit holders | 2(42A) | Tax implications in the hands of unit holders:
Ø STT leviable on trading of listed units on a recognized stock exchange; Ø The period of holding of units of business trust to qualify as “long-term capital assets” is “more than 36 months”; |
| 10(38)
111A |
Ø Long-term capital gains would be exempt in the hands of the unit-holders;
Ø Short-term capital gains would be subject to concessional rate of tax@15% (plus surcharge, if applicable, and cess@3%). |
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| (2) | Exchange of shares in SPV by sponsor for units of Business Trust | 47(xvii) | Tax implications in the hands of the sponsor:
Ø Such exchange is not treated as a transfer. Hence, taxability of capital gains on such transfer deferred to the time of disposal of units by the sponsor; |
| 10(38) &
111A |
Ø 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. 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 in the like manner as in the case of sale of unlisted equity shares under an IPO. The benefit of concessional tax regime of tax @15% on STCG and exemption of LTCG under section 10(38) shall be available to the sponsor on sale of units received in lieu of shares of SPV subject to levy of STT. | ||
| 49(2AC) | Ø For computing capital gains in the hands of the sponsor, cost of acquisition of units would be deemed to be the cost of acquisition of shares to the sponsor; | ||
| 2(42A) | Ø For computing capital gains in the hands of the sponsor, the period of holding of units to include the period of holding of shares for determining whether the capital gains is long-term or short-term. | ||
| (3) | Interest income of business trust from SPV | 10(23FC)
194A(3)(xi) |
Tax implications in the hands of the business trust & unit holders and TDS implications in the hands of the SPV & business trust:
Ø Pass-through status for interest received by business trust from SPV: § Interest income is not taxable in the hands of the business trust; and § SPV is not required to deduct tax at source on interest paid to business trust. |
| 115A(1)
(iiac)
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Ø Tax consequences on distribution of such income by the business trust to the unit-holders:
§ Interest income taxable in the hands of the unit holders – o @5%, in case of unit holders, being non- corporate non-residents or foreign companies; and o at normal rates of tax, in case of resident unit holders. |
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| 194LBA | § Business trust to deduct tax at source on interest component of income distributed to unit holders:
o @5%, in case of unit holders, being noncorporate non-residents or foreign companies; and o @10%, in case of resident unit holders. |
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| (4) | Interest payments to nonresident lenders on ECBs by the business trust | 194LC | TDS implications in the hands of business trust:
Ø TDS@5% on interest payments to non-resident lenders on ECBs by the business trust [Such interest would attract tax in the hands of the nonresident lenders@5% as per section 115A]. Ø The above concessional rate of TDS is applicable to moneys borrowed by the business trust in foreign currency from a source outside India, with the approval of the Central Government – (a) Under a loan agreement at any time before 1.7.2017; (b) By way of issue of long-term bonds at any time on or after 1.10.2014 but before 1.7.2017 |
| (5) | Dividend received by the business trust from SPV | 115-O &
10(34) |
Tax implications in the hands of the SPVs, business trust and unit holders:
Ø Since the SPV would be subject to dividend distribution tax u/s 115-O, the dividend received by the business trust would be exempt in its hands; |
| 10(23FD) | Ø The dividend component of income distributed by the trust to unit holders will also be exempt from tax in the hands of unit holders. | ||
| (6) | Capital gains on disposal of assets by the Business Trust | 115UA(2) | Tax implications in the hands of the Business Trust and Unit holders:
Ø Capital gains is chargeable at the applicable rates in the hands of the Business Trust: § In case of long-term capital gains, the provisions of section 112 would apply; § In case of short-term capital gains on sale of listed shares, the provisions of section 111A would apply; § Short-term capital gains, other than the gains subject to tax under section 111A, would be subject to maximum marginal rate. |
| 10(23FD) | Ø If such capital gains are further distributed to unit holders, the component attributable to capital gains would be exempt in the hands of the unit holders. | ||
| (7) | Rental income arising to REIT from real estate property directly held by it | 10(23FCA) | Ø Rental income of REIT from directly owned real estate asset
Any income of a business trust, being a REIT, by way of renting or leasing or letting out any real estate asset owned directly by such business trust is exempt in the hands of the business trust |
| 115UA(3) | Ø Distributed income received by unit holder
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 is deemed as income of unit holder. |
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| 194LBA (from 1.6.2015) | Ø Distribution by REIT to unit holders of rental income from real estate assets directly owned by it
► TDS@10% in case of distribution to a resident unit holder. ► TDS at rates in force in case of distribution to a non-resident unit holder. |
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| 194-I (from 1.6.2016) | Ø Rental income received or credited to a REIT
Where the income by way of rent is credited or paid to a business trust, being a REIT, in respect of any real estate asset, owned directly by such business trust, tax is not deductible at source. |
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| (8) | Income of business trust [Other than interest and dividend from SPV and capital gains subject to tax u/s 112/ 111A] | 115UA(2) | Tax implication in the hands of the Business Trust and Unit holders:
Ø Any other income of the trust is chargeable to tax at the maximum marginal rate (i.e., @33.99%). |
| 10(23FD) | Ø Such income distributed to unit holders would be exempt in their hands. |
Illustration
A business trust, registered under SEBI (Real Estate Investment Trusts) Regulations, 2014, gives particulars of its income for the P.Y.2015-16:
(1) Interest income from Beta Ltd. – Rs 4 crore;
(2) Dividend income from Beta Ltd. – Rs 2 crore;
(3) Short-term capital gains on sale of listed shares of Beta Ltd. – Rs 1.5 crore;
(4) Short-term capital gains on sale of developmental properties – Rs 1 crore
(5) Interest received from investments in unlisted debentures of real estate companies – Rs 10 lakh;
(6) Rental income from directly owned real estate assets – Rs 2.50 crore
Beta Ltd. is an Indian company in which the business trust holds controlling interest. The business trust holds 70% of the shareholding of Beta Ltd.
Discuss the tax consequences of the above income earned by the business trust in the hands of the business trust and the unit holders, assuming that the business trust has distributed Rs 10 crore to the unit holders in the P.Y.2015-16.
Answer
Tax consequences in the hands of the business trust and its unit holders
(1) Interest income of Rs 4 crore from Beta Ltd.: There would be no tax liability in the hands of business trust due to pass-through status enjoyed by it under section 10(23FC) in respect of interest income from Beta Ltd., being the special purpose vehicle [See Notes 2 & 3 below]. Therefore, Beta Ltd. is not required to deduct tax at source on interest payment to the business trust.
However, the business trust has to deduct tax at source under section 194LBA –
– @10%, on interest component of income distributed to resident unit holders; and
– @5%, on interest component of income distributed to non-corporate non-resident unit holders and foreign companies.
Interest component of income distributed to unit holders is taxable in the hands of the unit holders – @5%, in case of unit holders, being non-corporate non-residents or foreign companies; and at normal rates of tax, in case of resident unit holders.
The interest component of income received from the business trust in the hands of each unit-holder would be determined in the proportion of 4/11.1, by virtue of section 115UA(1) [See Notes 1 & 4 below].
(2) Dividend income of Rs 2 crore from Beta Ltd.: There would be no tax liability in the hands of the business trust since dividend is subject to dividend distribution tax under section 115-O in the hands of Beta Ltd; Hence, the dividend income is exempt under section 10(34) in the hands of the business trust.
Any distributed income referred to in section 115UA, to the extent it does not comprise of interest referred to in section 10(23FC) received by unit holders, is exempt in their hands under section 10(23FD). Therefore, by virtue of section 10(23FD), there would be no tax liability on the dividend component of income distributed to unit holders in their hands.
(3) Short-term capital gains of Rs 1.50 crore on sale of listed shares of Beta Ltd.: As per section 115UA(2), the business trust is liable to pay tax@15% under section 111A in respect of short-term capital gains on sale of listed shares of special purpose vehicle [See Note 6]. There would, however, be no tax liability on the capital gain component of income distributed to unit holders, by virtue of the exemption contained in section 10(23FD) [See Note 5].
(4) Short-term capital gains of Rs 1 crore on sale of developmental properties: It is taxable at maximum marginal rate of 33.99% in the hands of the business trust as per section 115UA(2) [See Note 6]. There would be no tax liability in the hands of the unit holders on the capital gain component of income distributed to them, by virtue of the exemption contained in section 10(23FD) [See Note 5].
(5) Interest of Rs 10 lakh received in respect of investment in unlisted debentures of real estate companies: Such interest is [email protected]%, being the maximum marginal rate, in the hands of the business trust, as per section 115UA(2) [See Note 6]. However, there would be no tax liability in the hands of the unit holders on the interest component of income distributed to them, by virtue of section 10(23FD) [See Note 5].
(6) Rental income of Rs 2.50 crore from directly owned real estate assets: Any income of a business trust, being a REIT, by way of renting or leasing or letting out any real estate asset owned directly by such business trust is exempt in the hands of the trust as per section 10(23FCA).
Where the income by way of rent is credited or paid to a business trust, being a REIT, in respect of any real estate asset held directly by such REIT, no tax is deductible at source under section 194-I.
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 is deemed income of the unit holder as per section 115UA(3). The business trust has to deduct tax at source@10% under section 194LBA in case of distribution to a resident unit holder and at rates in force in case of distribution to a non-resident unit holder.
Notes:
(1) New Chapter XII-FA, containing the special provisions relating to business trusts, has been inserted w.e.f. A.Y.2015-16. Section 115UA(1) provides that 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.
(2) Section 10(23FC) exempts any income of a business trust by way of interest received or receivable from a Special Purpose Vehicle (SPV). Thus, the business trust enjoys a passthrough status in respect of interest received or receivable from a SPV.
(3) SPV means any company or LLP in which the business trust holds controlling interest and any specified percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration [not less than 50% as per the current SEBI (Real Estate Investment Trusts) Regulations, 2014]. Since Beta Ltd. is an Indian company in which the business trust holds controlling interest and 70% of shareholding, it is a special purpose vehicle. It is presumed that Beta Ltd. fulfills the other conditions specified in the regulations to qualify as an SPV.
(4) The distributed income of the business trust, to the extent it comprises of interest referred to in section 10(23FC) and rental income referred to in section 10(23FCA), is deemed to be the income of the unit holder in the previous year of distribution and subject to tax in the hands of the unit holder in that year. Accordingly, the business trust is required to deduct tax at source on the interest component and rental component of income distributed to its unit holders.
(5) Any distributed income referred to in section 115UA, to the extent it does not comprise of interest referred to in section 10(23FC) and rental income referred to in section 10(23FCA), received by unit holders is exempt in their hands under section 10(23FD).
(6) Section 115UA(2) provides that subject to the provisions of sections 111A and 112, the total income of a business trust shall be chargeable to tax at the maximum marginal rate.