While the government may have moved a step closer to the launch of Real etstate investment trusts or Reits by giving certain exemptions in the union budget, developers and tax experts believe that some glitches still exist for the launch of the instrument.
Reits are like mutual funds which can be listed and traded on stock exchanges. They are tax efficient as they need to distribute majority of their income as dividends. In the Union Budget for 2015-16, the finance minister exempted capital gains for the sponsors at the time of listing of units of Reits and gave pass-through of rental income on assets held by Reits to unit holders, which were long pending demand of investors and developers.
But with no clarity on minimum alternate tax (MAT) and dividend distribution tax (DDT) could be the biggest dampeners for launching Reits, say developers and tax experts. Read our full coverage on Union Budget
"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 counrty's largest developer which is expected to be benefited from launching Reits. Sunil Hingorani, director (finance) at K Raheja Corp, one of the largest owners of commercial properties in the country, elaborates.
"This (exemptions) do not do anything. When you are transfering assets to Reit, holding companies attract MAT on 100 per cent of notional gains," Hingorani says.
He adds that since companies distribute entire profits, there is a lot of tax leakage. Some like Punit Shah, co head of tax at KPMG believes MAT liability is triggered twice in Indian scenario. Shah says the exemptions announced by the FM becomes irrelevant since MAT liability is triggered twice once at the sponsor level when he transfers shares to Reit and secondly when they sell units of Reits.
"This could act as dampener in the process of launching Reits," he said, He said the FM has also not clarified on stamp duty which is a state subject.
However, Atul Ruia, managing director at Phoenix Mills say that barring DDT issue, budget proposals are extremely positive for the launch of Reits and they are seriously considering the launch of Reits this year.