Budget 2023 on February 1 enhanced the scope of taxation of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INvITs) by including income that was not previously taxable.
These will be taxed in the hands of unit holders from April 1, 2024.
Dual non-taxation of any money distributed by the business trust, i.e., which is exempt in the hands of the trust as well as the unit holder, is not the intent of the special taxation regime applicable to such investment vehicles, the Budget document said.
“The amendment proposed for REIT/InVIT related to distribution by manner of ‘Repayment of debt’ to the unitholders is now covered under the ambit of taxation as other income (net of cost of acquisition of the unit) which earlier was not captured. This was acting as an incentive for many sponsors. Any foreign investor receiving the said distribution will be taxed at 40 percent plus surcharge,”
These amendments will take effect from April 1, 2024 and will apply to assessment year 2024-25 and subsequent assessment years, the Budget document said.
Scope of taxation of money distributed by business trusts has been enhanced to include income not previously covered, a tax expert said.
“Taxability of return of capital in case of REITs would force a relook at the distribution models of REITs,”
REIT Rules
REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. REITable properties in India will include commercial assets – primarily office space – that can generate steady rental income.
They operate like mutual funds or shares. REITs have to be mandatorily listed on exchanges and traded like securities. Small investors can buy units in REITs from both primary and secondary markets just as they buy shares or mutual funds.
As per the guidelines for REITs, 80 percent of the company’s assets must be invested in completed projects, and only 20 percent in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities. To ensure regular income to investors, it has been mandated to distribute at least 90 percent of the net distributable cash flows to the investors at least twice a year.
Income From Other Sources
“Interest, dividend and rental incomes have been accorded a pass-through status at the level of business trusts and are taxable in the hands of the unit holder. However, in respect of the distributions made by the business trust to its unit holders, which are shown as repayment of debt, are actually distributions of surplus cash and it is seen that it did not suffer taxation either in the hands of business trust or in the hands of the unit holder.”
“It is proposed to make such sums received by a unit holder taxable in his hands. Hence Section 56(2)(xii) is proposed to be inserted to provide that such income shall be included as income from other sources received by a unit holder from a business trust.”
The budget document noted that that Finance (No.2) Act, 2014 introduced a special taxation regime for REITs and InVITs (commonly referred to as business trusts).
The special regime was introduced in order to address the challenges of financing and investment in infrastructure. The business trusts invest in special purpose vehicles (SPVs) through equity or debt instruments.
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Keeping in mind the business structure, the special taxation regime under section 115UA of the Act, inter-alia, provides a pass-through status to business trusts in respect of interest income and dividend income received by both of them from an SPV and rental income in case of REIT.
Such income is taxable in the hands of the unit holders unless specifically exempted, the document said.