FPIs look to Budget for clarity on REIT, InvIT taxation rate

Uncertainty arises from tweak in SCRA; entities take conservative view, pay higher tax of 20% on interest income

The Union Budget may provide clarity on the tax to be paid on interest income earned from investments in real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs) by foreign portfolio investors (FPIs).

Several FPIs have taken a conservative view and have started paying a higher tax of 20 per cent for such income. This is because of the amendment in the definition of ‘securities’ in the Securities Contracts Regulation Act (SCRA) with effect from April 1, 2021, which now extends to the units of REITs and InvITs as well.

Interest income distributed by a business trust to non-resident unit holders attracts a tax rate of 5 per cent plus applicable surcharge and cess, under section 115A of the Income Tax (I-T) Act. The objective of introducing a specific tax regime for business trusts, said experts, was to boost investment in vehicles such as REITs and InvITs. Hence, this section provides for grant of concessional tax treatment.

However, while section 115A of the I-T Act provides for tax rates on specified incomes for a general category of taxpayers (all non-residents), section 115AD provides for rates applicable to a specific category of non-residents: FPIs. Also, while 115AD applies to income in respect of securities in general, section 115A has a specific provision for a type of income under consideration: Income by way of interest from a business trust.

“There is a lack of clarity on whether FPIs can get the benefit of 5 per cent TDS rate on interest income from REITs and InvITs after the definition of securities under SCRA was expanded to cover business trusts. A specific relaxation on this would help,” said Rajesh Gandhi, partner, Deloitte India, adding that the long-term holding period for such investments should be reduced to one year to boost FPI investment.

Experts suggest that the amendment to the SCRA without a corresponding amendment in section 115AD seems to have resulted in an unintended burden of higher tax incidence on FPIs on interest received from business trusts, which appears to be an oversight.

“The legislative intent behind the introduction of clause (iiac) in section 115A(1)(a) and section 194LBA(2) of the Act was to accord concessional tax treatment to all non-resident unit holders of the business trust. There is nothing to suggest that the amendment to the SCRA was made with the intention of denying the above benefit under section 115AD of the Act,” said Suresh Swamy, a chartered accountant.

REITs and InvITs typically pay out at least 90 per cent of their net cash flow to unitholders in the form of dividends and interest.

Last year, the RBI allowed FPIs to invest in debt securities issued by REITs and InvITs with the objective of providing capital and liquidity to the two asset classes.