The government's proposal to shift dividend distribution tax in the hands of investors will negatively impact NHAI and PowerGrid plans to raise funds through InvIT as higher tax incidence will make the instrument less attractive, rating agency Icra said.
In the Union Budget announced on February 1, Finance Minister Nirmala Sitharaman proposed removal dividend distribution tax (DDT), which will make dividend income from shares and mutual funds taxable in the hands of the unit-holder instead of the company at applicable income tax rates.
As per media reports, NHAI plans to initially raise Rs 15,000-20,000 crore and scale it up to Rs 40,000 crore later through monetisation of road assets, while PowerGrid Corporation has plans to monetise transmission assets of Rs 10,000 crore.
"As many as Rs 80,000 crore worth of InvITs were expected to be launched in 2020 of the Rs 2 trillion worth estimated in the next five years. However, the higher tax incidence in the hands of the unitholders will result in lower net-yield and reduced equity IRR, making equity raising a challenge," Icra Senior Vice-President Shubham Jain told reporters.
InvITs have been an attractive vehicle for developers to unlock capital deployed in operational projects and helps in reducing the cost of debt for infrastructure projects, he said.
"Also, foreign institutional investors find InvITs attractive due to their stable long-term returns, relatively lower risks because of operational portfolio and better corporate governance. If InvITs have to succeed, a conducive regime is the key and much would depend on regulatory and tax regime," Jain added.
According to Icra, domestic unit holders are likely to witness 34 per cent drop in returns, while foreign investors will witness around 22 per cent decline in returns.
Till date, Rs 22,000 crore have been raised from investors through InvITs, while another Rs 32,500 crore is in advanced stages.
Tower Infrastructure of Reliance Jio, a second InvIT from IRBprivately placed with GIC and acquisition of eight road assets by L&T's IndInfravit from Sadbhav are the ones in advanced stages.
Jain further said the Budget has also proposed full tax exemption to sovereign wealth funds, which could support higher participation from sovereign funds.
"Also, the amendment in definition of Business Trusts made to include unlisted private placed InvITs will lead to tax parity between unlisted and listed private placed InvITs resulting in former likely to gain prominence due to lower compliance cost," he added.
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