Tax inputs for next Budget trickle in

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No bumpy ride for real estate investment trusts

The government is expected to spell out in Budget 2008-09 the tax structure for real estate investment trusts (REITs). The finance ministry may follow a global practice that permits these trusts—set to come up soon—to deduct dividends paid to shareholders from their corporate taxable income.

A REIT is a trust that owns and operates income-producing real estate assets such as shopping centres, hotels and offices. “REITs enable small investors to participate in realty and generate income for shareholders through lease rentals and property appreciation,” says Vineet K Vohra, MD & CEO of ING Investment Management (India) Pvt Ltd.

Sebi last week said it was considering introducing REITs to India. A finance ministry go-ahead to a tax structure will enable companies to pitch in as competing investment avenues. The ministry had been simplifying taxes for investment instruments so that there were no avenues for tax arbitrage. The trend was unlikely to be disturbed, a government official said.

As a result, the tax structure for REITs could be similar to that for equity-based mutual funds. As in the case of mutual fund trusts, registered under the Indian Trust Act, 1882, real estate trusts, too, are expected to be exempt from tax. But stockholders would need to pay dividend distribution tax.

Experts say REITs would be a huge success in India. “With the market comprising listed Indian real estate companies expected to touch the $5-billion mark in the next 4-5 years, REITs offer a tremendous opportunity,” says DLF CFO Ramesh Sanka.