Finance minister Arun Jaitley’s move in the Budget to exempt the dividend distribution tax (DDT) from real estate investment trusts (REITs) and Infrastructure Investment Trust (InvIT) removes the last roadblock towards making the business trusts a reality in the country. Industry experts feel that the development is a game-changer as it now gives companies the wherewithal to monetise marquee income-generating infrastructure and real estate assets.
Tax regulations surrounding REITs has been a matter of debate for the past two years. After the DDT was retained as an obligation in last year’s Budget, front runners for REITs such as Embassy Parks, a joint venture between the US-based private equity (PE) company, Blackstone and Bengaluru-based real estate company, Embassy Group and K Raheja Corporation, put their plans on hold. “We are sitting on the fence right now, preparing to launch our issue within 6-8 months, provided the government amends the DDT regulation,” Jitu Virwani, group CEO of the Embassy Group had told FE last June.
Some other companies like DLF is believed to have been debating whether to consider a REIT or stake sale in its commercial portfolio. Without the DDT exemption, companies would have to necessarily create debt-heavy SPVs and ensure that the pay-out is in the form of interest instead of dividend, thus avoiding the DDT levy. But as Anish Sangvi, partner at PwC pointed out, a high interest burden would lead to companies stripping off profits and revamping the entire capital structure, which companies can now totally avoid.
A relaxation of DDT also brings tax regulations at par with competitive global markets. As Samir Kanabar, partner at EY, pointed out that removal of DDT from infrastructure investment trusts (InvITs) is more attractive for investors.
“The DDT was acting as a major hindrance for the success of InvITs. For instance, for a foreign investor, a 20% DDT along with a hit on foreign exchange fluctuation would have impacted the rate of return,” said Kanabar.
In anticipation of REITs and InvITs, the allied sectors have been a hotbed of consolidation in the past three years.
In the last one year, Brookfield Asset Management bought nine road and power projects from Gammon Infrastructure Projects. Big ticket global funds like Blackstone, QIA partnered with local companies like Embassy, RMZ that have substantial commercial portfolio. Their homegrown rivals like DLF and K Raheja Corporation did not want to be left out and now have also amassed marquee assets, sensing similar opportunity to tap into funds.
* Tax regulations surrounding REITs has been a matter of debate for the past two years
* Removal of DDT brings tax regulations at par with competitive global markets
* Developers can now monetise marquee income-generating infrastructure assets