A day after finance minister Arun Jaitley announced MAT exemption for real estate investment trusts (REITs), realty companies are a happy lot.
“We are committed to the fiscal-end timeline for our first REIT listing,” said Rajiv Talwar, DLF managing director. Talwar is confident of DLF giving India its maiden REIT.
Experts, who were concerned that the lack of clarity on taxes may push the REIT timeline beyond FY16, are confident of a couple of REITs coming up in the current fiscal.
“I am confident, we will see the first REIT listing in the January-March quarter in the next calendar year,” said Rajeev Bairathi, executive director, capital markets and north, Knight Frank India.
Major players to express interest in an REIT listing are DLF, Embassy Office Parks — a joint venture between the Embassy Group and private equity behemoth Blackstone — and a joint venture firm between RMZ and Qatar Investment Authority. While the global funds backed REITs aim to raise R5,000 crore and R9,000 crore, DLF says it would launch two REITs, one on commercial assets and other on retail ventures.
Doing away with MAT and dividend distribution tax (DDT) were the key exemptions the developers were looking for.
While experts agree that doing away with MAT has removed a major policy hurdle, they are divided on the existing regulation over DDT. “While MAT exemption will certainly encourage developers to firm up their plans for REIT listing, the DDT payable will still act as a deterrant for foreign investors,” said Anish Sanghvi, partner (tax and regulatory) at PricewaterhouseCoopers India. Global funds will evaluate tax efficiency of the Indian REIT market visa-vis Singapore and Hong Kong, said Sanghvi.
He expects companies to actively engage with anchor investors in the global market to test investment appetite in the commercial real estate space before taking a final call on REITs.
Others, however, are far more optimist, as according to them, companies can structure REITs in a manner that minimises the implication of the DDT.
“If companies treat REITs act as a debt-raising instrument, create debt-heavy SPVs and repatriate the interest income to investors via coupons, a pass through status will be accorded as far as DDT is concerned.” said Bairathi.
“The special tax regime says that no tax is levied on interest income received from the SPV in the hands of the trust and no withholding tax is levied at the level of SPV. Withholding tax is levied in case of payments of this interest income to unit holders at 5% in case of non-resident unit holders and at 10% in case of resident unit holders,” explains Pranay Bhatia, partner at consulting firm BDO India LLP.
On other hand, in case an SPV is distributing dividend, it will be subject to dividend distribution tax (DDT) at the level of the SPV.