CII seeks tax exemption for REITS and InvITs

Industry body CII has sought capital gains tax exemption for REITs and Infrastructure Investment Trust (InvITs) on transfer of shares by sponsor.
REITs and InvITs are investment products that can be listed on stock exchanges like shares of any company and allow retail and institutional investors to buy or sell those securities.
The Budget 2014-15 notified the norms where Real Estate Investment Trust (REITs)/ InvITs were provided the 'pass through' status for the purpose of taxation to attract long-term foreign and domestic investors, the Confederation of Indian Industry said.
Later market regulator SEBI had notified norms for listing of new business trust structure REITs that would help attract more funds in a transparent manner into the realty sector.

"For sponsors to structure REITs/InvITs, there is a need to exchange shares in special purpose vehicles (SPVs) with units of REITs/InvITs.
"Such exchange of shares is in reality not a commercial transaction as the stakeholders of shares of SPVs are the same as unit holders of REITs/InvITs. Hence, there is no sound basis of taxing such an exchange in the absence of real income," CII said.

The industry body also suggested that sponsors of REITs and InvITs be exempt from levy of MAT and DDT at the special purpose vehicle (SPV) level.
"As exchange of shares is being done only to initialize REITs/InvITs with assets, therefore such gains should be exempt from Minimum Alternate Tax (MAT) as well as this act of exchange is not a transaction and therefore should not be treated as such," CII Director General Chandrajit Banerjee said.

"Since REITs are required to mandatorily distribute almost the entire annual income as dividends to unit holders, the underlying SPV would necessarily have to suffer the dividend distribution tax (DDT) liability when it distributes income to the REIT.
"This results in a multiple layer of tax, since the SPV would suffer this DDT levy in addition to corporate income tax on its taxable income. Outflow of Corporate Tax and DDT will bring down the earnings for distribution. Hence, SPV should be exempt from DDT on dividend distributed to REITs/InvITs", Banerjee said.