The proposal to tax dividends in the hands of unitholders and the resultant burden of double taxation have hit the prospects of existing as well as planned infrastructure investment trusts (InvIT) and real estate investment trusts (REITs), which have been looking to raise over $100 billion institutional capital in the next few years by unlocking value from predictable income-generating assets like telecom towers, gas pipelines, toll highways and office complexes.
The move also reverses a trend initiated by former finance minister Arun Jaitley, to provide tax stability for long-term infrastructure investors.
Investors and developers ET spoke to said they plan to meet the finance minister and government officials this coming week, seeking a roll back of the step.
Business trusts in India till the latest budget had a single level of tax — it was at source, or the corporate tax paid by the special purpose vehicles that own the assets. With the rest of the chain being tax exempt, these were similar to global business trusts. The SPVs paid tax only on their annuity income — rents, tolls, etc. — and hence there was only a single point of taxation.
The plan to amend the tax treatment of dividend income received by unitholders of these instruments is likely to create two levels of taxation. That could jeopardise new fundraising plans of domestic infrastructure companies and put to question the investments already made by marquee global investors.
According to estimates, since their introduction in India, InvITs and REITs have together raised more than $3.6 billion of capital. Another $5 billion of InvIT transactions have already been announced, including Brookfield Jio’s telecom towers and the L&T IDPL follow-on issuance. These investment vehicles are also seen as critical to the government’s plan to spend $1.4 trillion to develop nationwide infrastructure over the next five years.
“Currently, under the provisions of the Income Tax Act (ITA), no DDT is chargeable on any amount declared, distributed or paid by a 100% SPV by way of dividends (whether interim or otherwise) to a business trust out of its current income,” said Nishitsh Desai, the founder of the eponymous law firm. “Furthermore, under Section 10(23FD) of the ITA, while distributed income in the nature of interest received or receivable from an SPV (which is upstreamed by the InvIT as a passthrough entity) is taxable in the hands of the unitholders, income in the nature of dividend is exempt from tax in the hands of unitholders. Thus, there were no taxes on distribution of dividend income by the SPV to the business trust, and on subsequent distribution by the business trust to the unitholder.”
Along with the removal of the DDT regime, the budget also proposes to amend Section 10 (23FD) of the Act to exclude from exemption the dividend income received by a unitholder from a business trust. This effectively implies that the dividend income becomes taxable in the hands of the unitholder. This results in a situation that, while the dividend income distributed by an SPV to a business trust would not be taxed in the hands of the business trust, it would be deemed to be the income of the unitholder and would be taxed in the hands of the unitholder.
BCCL
Unlike corporates, business trusts are mandatorily required to distribute 90% of their cash flows and cannot retain cash — this was the premise on which DDT exemption was granted to REITs. Unless dividends by a business trust are exempt, it would lead to an uneven playing field, say experts.
“Across jurisdictions, business trusts only have one level of taxation with no corporate tax being charged. This product really allowed small retail investors the ability to have fractional ownership of infrastructure or realty assets,” said the head an institutional firm with a large footprint of infrastructure assets in the country.
STUTTERED START
While the guidelines for both InvIT and REITs were introduced in 2014, it wasn’t until 2017 when the products really took off, after multiple consultations with the senior officials of Prime Minister Narendra Modi’s earlier government. These took off only after the 2016 Finance Bill made the local tax framework consistent with the global framework, with a single level of taxation.
“The first REIT from Embassy (Group) got off the ground only in April 2019. Instead of providing stability of taxing outcomes in a capital-starved environment, we are looking to upend the law without providing any relief to existing investors,” said Bobby Parikh, the founder of tax and regulatory advisory services firm Bobby Parikh Associates. “Future investments through the InvIT route will be seen as commercially unattractive or unfeasible when compared to other yield-based investment alternatives.”
Indian InvITs and REITs have attracted some of the largest global institutional investors, sovereign wealth funds and pension funds, as diverse as Brookfield, GIC of Singapore, CPPIB, Omers, Blackstone, either as sponsors or significant investors. Players like Abu Dhabi Investment Authority have also been keen to look at such opportunities and have been engaged with Reliance Jio for its fibre to home assets that has been created into an InvIT. The proposed changes would hurt their investments with a long-term view (10-15 years). Such changes could also impact their confidence and ability to bet on India, given that the investments have been structured with a certain tax impact in mind. This could lead to exporting of the capital markets, with more overseas issuances. “Loss of STT and other taxes on trading of the units would men a loss to exchequer. This would be similar to the GDR deluge of the past,” said an infrastructure company CEO.
The changes will also impact any future capital raising for these products. According to a note from real estate consultancy JLL before Saturday’s budget presentation, the Indian REIT market alone might grow to $35 billion over the next few years.
Some of the largest governmentrun infrastructure entities, such as the National Highway Authority or Power Trading Corporation, have reportedly been looking to monetise their road and transmission assets through InvITs.
Source: Economic Times
