Developers in no mood to embrace REITs despite Budget sops

Say there is no clarity on MAT and dividend distribution tax

While the government may have moved a step closer to launching real estate investment trusts, or Reits, by giving certain exemptions in the Union Budget, developers and tax experts believe some glitches are still there.

Reits are like mutual funds that can be listed and traded on stock exchanges. These need to distribute a majority of their income as dividends. In the Budget for 2015-16, the finance minister exempted capital gains for the sponsors at the time of the listing of units of Reits and gave a pass-through of rental income on assets held by Reits to unit holders. These were long-pending demands of investors and developers.


But no clarity on the minimum alternate tax (MAT) and the dividend distribution tax (DDT) could be the biggest dampeners for launching Reits, say developers and tax experts.

"Internationally, there is no MAT or DDT. We will have to see whether investors find domestic structures attractive or not. It depends on how investors look at tax implications here," said Rajeev Talwar, executive director at DLF, the country’s largest developer, which is expected to benefit from launching Reits.

Sunil Hingorani, director (finance) at K Raheja Corp, one of largest owners of commercial properties in the country, elaborates: "These exemptions do not do anything. When you are transfering assets to Reit, holding companies attract MAT on 100 per cent of notional gains."

He adds that since companies distribute entire profits, there is a lot of tax leakage. Punit Shah, co-head of tax at KPMG, believes the MAT liability is triggered twice in the Indian scenario. Shah says the exemptions announced by the minister become irrelevant, since the MAT liability is triggered twice: Once at the sponsor level, when one transfers shares to a Reit, and then when one sells units of Reits.

"This could act as a dampener in the process of launching Reits," he said. He said the minister had also not clarified on the stamp duty, which is a state subject.

However, Atul Ruia, managing director at Phoenix Mills, says that barring the DDT issue, the Budget proposals are extremely positive for the launch of Reits, and the company is seriously considering the launch of Reits this year.

THE REITS RIDDLE: TO BUY OR NOT TO BUY?

• Reits are like mutual funds that can be listed and traded on stock exchanges
   
• These are tax-efficient. These need to distribute a majority of their income as dividends
   
• No clarity on minimum alternate tax and dividend distribution tax (DDT) could be the biggest dampeners for launching Reits, say developers and tax experts
   
• Some say barring the DDT issue, budget proposals are positive for the launch of Reits