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Concept of Business trust introduced by Finance act 2014-2015

Ankur Gupta 
on 23 December 2015

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Introduction

Hon'ble Finance Minister introduced the concept of Business Trust. In India, Business Trust would operate as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Real Estate Investment Trusts (REITS) have been successfully used as instruments for pooling of investment in several countries. REITs were created in the United States in 1960. Since then, many countries around the world have established REIT regimes.

The Securities and Exchange board of India (SEBI) has notified regulations relating to the two new categories of investments vehicles namely, the real Estate Investment trust (REIT) & Infrastructure Investment Trust (InVIT), the government has decided to provide significant tax benefits for these listed business trusts. As per finance act 2015 "business trust" means a trust registered as,:

(i) An Infrastructure Investment Trust under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 or

(ii) a Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 and The units of which are required to be listed on recognized stock exchange in accordance with the aforesaid regulations.

The income-investment model of REITs and InvITs (referred to as business trusts) has the following distinctive elements:

1. the trust would raise capital by way of issue of units (to be listed on a recognized stock exchange) and can also raise debts directly both from resident as well as non-resident investors;

2. The income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor. Real Estate Investment Trusts (REITs) & Infrastructure Investment Trusts(InvITs) Real Estate Investment Trust (REIT) is a trust which owns and manages the income generating developed properties and offers its unit to the public investors. REITs own many types of commercial real estate, which is ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands.

REITs are principally expected to invest in completed assets. REITs income would consist of rental income, interest income or capital gains arising from sale of real assets / shares of SPV. REITs are managed by professional managers which have sharp skill bases in property development, redevelopment, acquisitions, leasing and management etc. Listed REITs provide liquidity also, thus providing easy exit to the investors.

Infrastructure Investment Trusts make direct investment in infrastructure facilities which are yielding income e.g. Toll Road, Railways, Inland waterways, Airport, Urban public transport. InvITs will allow infrastructure developers to monetize specific assets, helping them use proceeds for completing projects of theirs stalled for want of funds. Structure of InvITs is quite similar to REITs.

The main difference is that InvITs make investment into infrastructure facilities whereas REITs make investment in commercial real estate properties. Finance Minister had addressed the issues to simplify REITs taxation regime. In his budget speech of Union Budget 2015-16, Finance Minister has mentioned that these collective investment vehicles (namely REITs and InvITs) have an important role to revive construction activity. A large quantum of funds is locked up in various completed projects which need to be released to facilitate new infrastructure projects to take off.

Taxability of Business Trust

Where the total income of an assessee includes any income chargeable under the head "Capital Gain" arising from the transfer of a short term capital assets, being an equity shares in a company or a equity oriented fund or unit of a business trust and-

(a) The transaction of sale of such equity shares or unit is entered into on or after 1.10.2004 and

(b) Such transaction is chargeable to securities transaction tax.

The tax payable by the assessee on the total income shall be calculated at the rate of fifteen per cent. Any income arising from the transfer of a long term capital asset being an equity shares in a company or a unit of an equity oriented fund or a unit of a business trust shall be exempt from the tax from Assessment year 2005-06. As per section 10(23FC) any income of a business trust by way of interest received or receivable from a special purpose vehicle shall be exempt from tax. As per section 10(23FCA) any income of a business trust,BEING A REAL ESTATE INVESTMENT TRUST, by way of a renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt from tax. As per section 47(xvii) there will be no capital gain on any transfer of a capital asset, being shares of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor.

Tax Deducted at Source

Where any distributed income is payable by a business trust to its unit holders being a resident, the person responsible for making the payment shall at the time of credit of such payment to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of ten percent. Where any distributed income is payable by a business trust to its unit holders being a non resident or a foreign company, the person responsible for making the payment shall at the time of credit of such payment to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of 5%.

Illustration: Suppose a REIT earns Rs. 20 crores income; Rs 8 crore from rentals from real estates, Rs 4 crore as interest from SPV, Rs 6 crore as the dividend from SPV and 2 crore as capital gain. Suppose the REIT distributes Rs 12 crore to its unit holders. A unit holders Mr X receives Rs 100000, then the treatment of this 100000 in Mr X’s hands is as follows:- Rental Income: 8 crore/20 crore x Rs 100000 = Rs 40000 Rs 40000 is exempt in Mr X's hands under section 10(23FD). It is exempt whether Mr X is a resident or non resident.

Interest income received from SPV : 4 crore/20 crore x Rs 100000= Rs 20000 Rs 20000 are taxable in Mr X's hand under the head from other source. It will be taxable at normal tax rates if unit holder is a resident.TDS will be deducted by business trust under section 194LBA. In case non-resident, this is taxable in the hands of the non-resident at the rate of 5%.

TDS will be deducted @5% under section 194LBA. Dividend Income: 6 crore /20 crorex Rs 100000 =Rs 30000 Rs 30000 is exempt in Mr X's hands under section 10(23FD). This is exempt whether Mr X is a resident or non resident.

Capital Gain Income: 2 crore/20 crore x Rs 100000= Rs 10000 Rs 10000 is exempt in Mr X's hands under section 10(23FD). Conclusion In INDIA, the concept of Business Trust will help individual investors enjoy the benefits of owning an interest in the securitised real estate market.

The greatest benefit will be that of fast and easy liquidation of investments in the real estate market unlike the traditional way of disposing of real estate. To provide liberalisation, govt exempt the various incomes and capital gains to the unit holders.


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