After the finance minister did away with dividend distribution tax (DDT) for real estate investment trusts or REITs, capital gains tax is the biggest issue for the developers/investors considering whether to float one. “DDT was not the only issue. The other tax issue to be resolved is complete pass-through for capital gains,” said Jayesh Kariya, partner at BSR & Associates.
When a REIT sells shares of a Special Purpose Vehicle (SPV) or assets, the capital gain is taxable in the hands of a REIT. Investors/developers want a complete pass-through.
In the previous Budget, the government announced capital gains tax exemption at the hands of the sponsor but it is a big issue at the REIT level, consultants said. Read our full coverage on Union Budget 2016 They say the finance ministry seemed agreeable to representations in this regard. Which is why the lack of a mention of this in the Budget was a disappointment. “Though the issue is not as big as DDT, it depends on the total value of assets to be brought under a REIT by a sponsor,” said Neeraj Sharma, director, Grant Thornton Advisory. Also, paying stamp duty while registering an asset could be a huge cost for a developer/investor and REIT aspirants are looking for some relaxation. “Stamp duty for moving assets under the trust is a likely need in some cases. This can be prohibitive, if the developer had not structured the original portfolio keeping a REIT in mind. This is a state subject and it might be a long haul,” said Kalyan Chakrabarti, managing director, Rising Straits Capital, a private equity entity, owning commercial assets. According to realty consultancy JLL, 80-100 million sq ft of office space in the country, worth at least Rs 100,000 crore, might qualify to be included under REITs. These assets could together generate annual rental of Rs 6,000 crore. Many investors and developers such as Blackstone-Embassy, Ascendas, RMZ, DLF and K Raheja were among the invrstors and developers looking at launching a REIT. They did not proceed, due to the tax leakages at various levels. REITs are similar to mutual funds, and can be listed and traded on stock exchanges. These have to distribute a majority of their income as dividend. BSR’s Kariya said the expectations of REIT investors is higher than a return of nine to 11 per cent a year, given the expectation of potential increase in the intrinsic value of property held through SPVs.
However, he said a REIT giving return of 9 to 11% will depend on various parameters like location of the asset, quality of asset, anchor tenants and rental yields, asset manager, etc.