Expert said that with the change in the dividend distribution tax (DDT), the foreign investors in REITs/InvITs were at a disadvantage now.
Finance minister Nirmala Sitharaman on Monday said that the government was considering suggestions received on taxation liability imposed on unit holders of REITS and InvITs after the Budget reverted to the classical system of taxing dividend in the hands of recipient. She was speaking at a post-Budget session with industry representatives in Bengaluru.
Expert said that with the change in the dividend distribution tax (DDT), the foreign investors in REITs/InvITs were at a disadvantage now. Hitherto, dividend received by REIT/InvIT from 100% SPV was not liable to DDT and not taxable either in the hands of REIT/InvIT or investors. This was based on the rationale that the SPV paid tax on rental and other incomes earned and hence there cannot be multiple points of taxation. But as per Budget proposal, the unit holders will need to pay tax on dividend income received from such SPVs and distributed by REIT/InvIT leading to double taxation in the hands of SPV and unit holders.
“This will adversely impact return in the hands of unit holders. The government needs to relook at this proposal and restore the single point of taxation as prevailed earlier. This is significant as the government is looking at monetising its assets through REITs and the Budget proposals may pose a serious impediment,” Gaurav Karnik, partner, tax and regulatory services at EY, said.
Sitharaman and revenue secretary Ajay Bhushan Pandey also defended the move to impose tax collected at source (TCS) of 0.1% on companies receiving payment for supplies worth above Rs 50 lakh in a year (applicable to firms with annual turnover of `10 crore) and TCS of 5% on overseas remittances through Liberalised Remittance Scheme (LRS). They argued that data analysis had revealed that such transactions could be sources of tax evasion and TCS was a method to bring people in the tax net without imposing additional tax burden.
Pandey argued that many companies under GST were declaring sales of `100 crore but were showing nil taxable income in income tax returns, and many individuals sending remittances worth $1 lakh weren’t filing income tax returns. He added that the department would be able to track tax evaders through TCS without resorting to sending notices to large number of taxpayers.
“Such headache will have to be endured till our tax net is wide enough. We are using big data so that we don’t have to send tax officials for a visit. With that data I am saying that I am deducting this much and adjust it against your tax liability. The quantum of TCS at 5% or 0.1% (under LRS) can always be debated,” Sitharaman said. She noted that it was a good idea to levy a 0.1% TCS on those producing tax returns at the bank while sending remittances while imposing 5% TCS on others.
Reacting to comment that Budget proposal to defer the tax on Employee Stock Option Plan (ESOP) only applied to 250-odd start-ups approved by an inter-ministerial group (IMG) as against 47,000 such firms operating in the country, Sitharaman asked if IMG was proving to be a deterrent for start-ups to register with DPIIT. Pandey said that while all new companies are technically start-ups, benefits meant for genuine could only be extended to those ratified by IMG on technical aspects, one which includes the condition that they prove their business model is ‘innovative’.