Developers to soon start process for REITs

According to the experts tracking the sector, MAT was one of the biggest hurdles in the way of REITs and now many players will start reviewing their plans on this

Real estate developers and foreign investors, who had recently sent out feelers that their Reits (real estate investment trusts) plans were either shelved or were on the backburner, are now back to discussing the finer points of the project after the government has relaxed norms on minimum alternate tax (MAT).

According to experts tracking the sector, MAT was one of the biggest hurdles in the way of Reits and now, many players will take a fresh look at on this.

On Thursday, Finance Minister Arun Jaitley said MAT would not be applicable on notional book gains, arising from exchange of shares in SPV (special purpose vehicles) with unit of trusts in infrastructure and real estate (Reits/InvITs).

The country’s largest real estate player, DLF, as well as others, including K Raheja, Supertech, Phoenix Malls and private equity players such as Blackstone, have been planning to launch Reits but were waiting for clarity on taxation issues. Now, the ambitious project is likely to take off, bringing in billions of dollars of investment.   

Applicability of capital gains and MAT on exchange of units against shares of SPV at the time of setting up Reits was a roadblock in the launch of these investment vehicles.

Ashok Tyagi, chief financial officer, DLF Group said, “This decision removes a major policy hurdle and will give a significant boost to the establishment of these trusts. This, coupled with the recently announced capital gains tax exemption at the hands of the sponsor and other fiscal incentives to investors will make infrastructure and real estate trusts far more viable and attractive.”

“DLF has already announced its intent to pursue Reits and DLF is committed to set up its first Reit within this year, consequent to receipt of all necessary approvals. These trusts provide a huge opportunity for unlocking capital,” he said.

Blackstone did not reply to a questionnaire on the matter.

In the Budget this year, the capital gains aspect had got an exemption for such a transaction, but MAT had continued to apply. “This did not stand to reason because the gain is notional as cash gets generated in the transaction. This amendment is a great relief to Reits as the tax will be levied only when the units of the Reits are sold,” Rahul Jain, partner, Nangia & Co, said.

Jain expects to see the launch of Reits in the country this year itself. However, he said removing dividend distribution tax (DDT) would have helped Reits.

Dividends paid by an SPV holding Reit attract DDT of 15 per cent. Subsequent distribution of income by the Reit in turn will be subject to TDS at the rate of 10 per cent for resident unit holders and five per cent for non-resident unit holders. Further, such income will be taxable in the hands of individual unit holders as well. The aggregate tax effect shall be considerably high, resulting in low yield, which may act as a deterrent to investment in Reits.

The government could have done well to keep Reits out of the ambit of DDT, especially when a Reit is required to distribute 90 per cent of its lease rental income to the unit holders, he said.

Reits are similar to mutual funds, which can be listed and traded on stock exchanges. These have to distribute a majority of their income as dividend.