GST Course

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1. Introduction:

• Real Estate Investment Trusts (REITS) have been successfully used as instruments for pooling of investment in several countries.

• Infrastructure Investment Trusts (InvITs), a modified REITS type for infrastructure projects is also being announced, which would have a similar tax status, for PPP and other infrastructure projects.

• SEBI has already provided draft regulations in relation to these categories through SEBI (Real Estate Investment Trusts) Regulations, 2013, which are yet to be notified.

• Finance Bill has provided necessary incentives for REITS which have pass through for the purpose of taxation.(Except in respect of capital gains on disposal of assets)

• Specific Regime in the Act for taxation of REITS and InvITs.

2. Objectives

• Reducing pressure on banking system

• Making available fresh equity

• Attracting long term finance from foreign and domestic markets.

• The expansion of asset delivery.

• Encouraging of PPP models as introduced in railway budget and finance budget. These models will play a key role in achieving such PPP model’s success.

• Facilitation of securitization of income earning real estate assets.(i.e. listing of units of REITS and InvITs).

3. Working Model of REITS and InvITs

Raising Capital

The trust would raise capital by way of issue of units or by debt directly from residents and Non resident Investors

Investing in SPV

The Income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian Company(SPV)

Listing of units

The Units issued by the trust will get listed in Stock exchange and will be governed by the SEBI guidelines

4. Taxation of REITS and InvITs

Dividends: (Tax-Exempt-Exempt)

• Company(SPV) distributing dividend to the business trust is subject to DDT.

• Dividend is exempt in the hands of the business trust.

• Dividend component of the income distributed by the business trust is treated as such in the hands of the unit holder and therefore is exempt in their hands. This amendment shall take effect from 1 October 2014.

Interest: (Exempt-Exempt-Tax)

Interest received by the business trust from any SPV is given a complete tax pass through status as under:

• Interest from SPV is not taxable in the hands of the business trust u/s 10(23FC).

• SPV is exempted from withholding tax on interest paid to the business trust as specifically excluded u/s 194A.

• Interest distributed by business trust is taxable in the hands of unit holders.

• Business trust will withhold tax on the interest component of the distributed income payable to the unit holders at the rate of 5 per cent for any non-resident unit holder and 10 per cent for a resident unit holder as per new TDS provision 194LBA.

Capital Gains:

The business trust is taxable on any capital gains earned by it on disposal of any assets at the applicable rate (depending upon whether the gains are short or long term) However, the capital gains component of the distributed income is exempt in the hands of the unit holders.

Capital gains on transfer of units of the business trust by investors:

• Units of the business trust shall be listed on the stock exchange;

• LTCG on transfer of units would be exempt and STCG would be taxable at the rate of 15 per cent provided STT is paid on the transfer of such units.

Tax implications in the unit holder’s hands on exchange of SPVs’ shares with business trust units:

• Exchange of shares of SPV for units of a business trust is not regarded as taxable transfer by a specific exemption provided u/s 47.

• Consequently, taxability is deferred till the time of ultimate disposal of the units by the sponsor.

• At the time of ultimate disposal of the units of the business trust, the sponsor shall not be entitled to avail the concessional STT-based capital gains tax regime. Further, the acquisition cost of the units to the unit holder shall be deemed to be the acquisition cost of the shares in the SPV.

• The holding period of shares shall also be included in the holding period of such units.

Other Points:

• Any other income of the trust shall be taxable at the maximum marginal rate u/s 115UA

• According to the new amendment,  units of business trusts are to be held for 36 months to consider as long term assets.

• The Business Trusts are required to file their return of incomes.

• Other reporting requirements are yet to be prescribed by SEBI in their guidelines.

• All the provisions will take effect from 1st October 2014.

Korada Devi Vara Prasad
CA Final, CWA Final Student

Tags: Finance Bill 2014, Taxation of Business Trusts, REITS, InvITs, New insertions in Finance Bill 2014, changes in finance bill 2014.

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Category Income Tax, Other Articles by - CMA Devi Vara Prasad Korada