The enthusiasm with which the real estate market greeted the clarity on taxability of Real Estate Investment Trusts (REITs) in Budget FY16 has given way to gloom as the fine print makes it clear that such trusts will continue to be highly taxed, diminishing investor returns.
Despite finance minister Arun Jaitley clarifying that sponsors will not bear capital gains tax on REITs and the same will be levied in the hands of the unitholder, there will be no rush for REITs as the industry still wants clarity on whether MAT (minimum alternate tax) and DDT (dividend distribution tax) will be applicable to REITs.
“Doing away with DDT and MAT were key exemptions we were looking for. Abolishing such taxes would have brought India on a par with international REIT markets,” said Rajiv Talwar, managing director at DLF.
Jitu Virwani, chairman of the Embassy Group, echoed similar concerns. “Companies can end up paying a very high tax rate. We will have to wait and see whether the government makes any subsequent clarification on the issue of DDT and MAT.”
Anish Sanghvi, partner (tax and regulatory) at PricewaterhouseCoopers India, observed that the effective rate of taxation on an REIT could be as high as 43% in some cases, including MAT, corporate tax and securities transaction tax.
“90% of lease rentals are supposed to be distributed to the buyers of the units. But there would be less incentive to invest (on the part of developers) if you cut down the returns in the form of DDT,” said Ashok Tyagi, chief financial officer, DLF.
“In no other instrument is the mandatory pay-out as high as 90%. Under such a composition, removing the DDT becomes even more relavant,” said the head of a Mumbai-based real estate firm. He declined to be named.
Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII), said that DDT would result in multiple layers of tax, since the special purpose vehicle (which holds the actual property) also has to pay corporate tax, which will bring down earnings for distribution.
DLF and Embassy Office Parks, a joint venture between the Embassy Group and Pe fund Blackstone, was expected to tap the REIT market to raise Rs 5,000 crore later this year. DLF too announced that it will monetise its nearly 30 million sq. ft commercial portfolio through an REIT listing. However, lack of clarity on the two key taxes is likely to scuttle plans and delay timelines.
Rajeev Bairathi, executive director, capital markets & North, Knight Frank India, said, “We had expected the first REIT listing towards the last quarter of FY16, provided there was absolute clarity on the tax front. Post the speech, we don’t know whether that would actually happen.”
“There are large HNIs and private funds active in the market who are willing to park funds in income-yielding assets, ” said the Mumbai-based developer cited earlier. “So under an unfavourable tax structure, it does not make sense to tap public funds. We would rather raise funds from the private market.” he added.
Market analysts say it is unlikely any company will go for an REIT listing this calendar year, or until the questions regarding MAT and DDT are resolved.
The budget fine print also revealed an important rider attached to the rationalisation of the capital gains tax. While transferring an immovable property itself to the REIT, the sponsor will end up paying capital gains tax on the transfer of such property. Further, the asset purchase by the REIT will be liable to stamp duty as well. Whereas, if it is shares that are transferred to the REIT in lieu of assets, such a transfer is exempt from paying capital gains tax and stamp duty.
This dichotomy has developers strapped for options and they are demanding a more level playing field.