The Budget proposal to tax income distributed by business trusts in the form of debt repayments will impact the unitholders’ post-tax return from investment in Real Estate Investment Trusts (REITs), according to real estate industry experts.The REITs sponsors will now have to re-look at their strategy of how to distribute cashflows to unitholders, they added.REIT, a popular instrument globally, was introduced in India a few years ago to attract investment in the real estate sector by monetising rent-yielding assets. It helps unlock the massive value of real estate assets and enables retail participation.
At present, there are three listed REITs – Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust – on Indian stock exchanges and all these are leased office assets.On Friday, Embassy Office Parks REIT said that the proposal impacts around 40 per cent of its current distribution and added that the industry might make a presentation to the government to highlight the success of the REIT and rising retail investors’ participation.
“As per the Budget 2023 announcement, repayment of debt to the unit holders is now taxable in the hands of investors and this would have an impact on the post-tax return of unit holders. This will have an impact on both InvITs and REITs,” said Anshul Jain, Head of Asia Pacific Tenant Representation and Managing Director, India & South East Asia, Cushman & Wakefield.The budget proposes to “tax distributed income by business trusts in the hands of a unit holder (other than dividend, interest or rent which is already taxable) on which tax is currently avoided both in the hands of the unit holder as well as in the hands of business trust”.
The distributions to unit holders shown as repayment of the debt are actually an income of the unit holder, which is not taxed either in the hands of the business trust or in the hands of the unit holder. Hence, it has been proposed to make such a sum received by the unit holder taxable in his hands.Lata Pillai, Managing Director and head of Capital Markets, India, JLL, said, “This will have an impact on returns for unit holders of those REITs who are using the repayment of the debt as a component of distribution. These REITs may have to relook at their strategy of distribution of cashflows”.Piyush Gupta, Managing Director, Capital Markets and Investment Services, Colliers India, said the Budget has widened the scope of taxation of REITs and INViTs by including income that was not previously taxable.”The proposed amendment relates to distribution by the manner of ‘Repayment of debt’ to the unitholders, which shall now be covered under the ambit of taxation as other income, which earlier was not taxed and was beneficial to certain REITs/ INViTs where the nomenclature of distribution is repayment of debt in the subsidiaries,” he said.
Vivek Rathi- Director of Research, Knight Frank India, noted that the REIT is an evolved investment structure for participation in stable real estate assets and has the potential to create a regular income stream for investors.”The budget has made changes to a portion of this regular income stream generally referred to as distribution. Unitholders could earlier avoid being taxed on distributions received from REITs if they were classified as ‘debt repayments’. The loophole has now been closed and such distribution from REITs will be treated as income for the unitholders and taxed in accordance with their Income Tax slabs,” he said.The annuity yield for Indian REITs ranged around 6-7 per cent per annum and a part of this will now be taxed thereby lowering the post-tax return for the unit holder, Rathi said.In a statement, Embassy REIT earlier said: “While the recent announcements in the Budget have created some uncertainties in the market regarding the taxation of one of the distribution components, the announcement impacts around 40 per cent of our current distributions”.
REITs are a total return product, combining steady distributions with upside on account of capital appreciation driven by growth levers, it noted. “We, along with other industry participants, are currently evaluating the next steps, including suitable representations given the to-date attractiveness and success of the product, especially to retail investors,” Embassy REIT said.
While a REIT comprises a portfolio of commercial real assets, a major portion of which is already leased out, an InVITs (Infrastructure Investment Trusts) consists of a portfolio of infrastructure assets, such as highways and power transmission assets.Pillai of JLL India explained that the REITs make three kinds of distribution to their unit holders, which are interest, dividend and repayment of debt.For the unitholders, she said, only the interest is subject to tax and the dividend is tax exempted.The repayment of debt component was not taxed in the hands of the trust or unit holders but now the Budget proposes to tax the debt repayment income distributed by REITs at the hands of unitholders, Pillai added.