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India Inc should not ignore the impact of minimum alternate tax (MAT) provisions in the income-tax law while evaluating real estate investment trusts (REITs) as a business opportunity.
This is one of the several tactical and strategic aspects that need to be considered before taking the plunge into REITs, say tax and industry experts.
In the developed world, owners of commercial properties, such as retail, office, industrial, hotels and healthcare, have traditionally adopted REITs structure due to its inherent benefits.
The benefits include single level of taxation, easier access to low cost capital and higher valuation attributed by capital markets.
The REITs market in Asia-Pacific region was estimated to be about $205 billion in 2013.
However, India till date has not been able to tap this funding opportunity.
The situation has now changed with the market regulator SEBI recently coming out with the final guidelines on REITs.
With the regulatory framework in place, Corporate India has embarked on feasibility studies before deciding on such investment vehicles.
The main hurdle for this new product to take off could be the not-so-conducive tax regime, especially for the sponsors (companies promoting such trusts).
An interesting aspect of the tax regime is the tax treatment of the sponsor company if it were to be a MAT paying company.
“There is no shelter available as far as MAT goes at the sponsor level," said Vishwas Panjiar, Director, Walker Chandiok & Co LLP, a firm of chartered accountants.
REIT players need to consider MAT provisions so as to fully appreciate the tax consequences of their structures, Aseem Chawla, Partner, MPC Legal, a law firm told Business Line here.
Neeraj Sharma, Partner, Walker Chandiok & Co LLP said that he does not see REITs as a non-starter.
“I think many people are ready to embrace the new investment vehicle. Some could still be evaluating it in terms of the returns.”
Why is MAT Important?
The concept of MAT was introduced in the income-tax law to ensure that no taxpayer with substantial income can avoid tax liability by using exemptions, deductions and incentives.
MAT brought to tax companies that made high profits and declared dividends to shareholders but had no significant taxable income due to incentives, exemptions and deductions.
A company that attracts MAT will have to consider the cash flow issues before deciding on converting itself into a REIT structure, say tax experts..
Under the income-tax law, if a company’s taxable income is less than a certain percentage of the booked profits, then by default that much of the book profits will be considered as taxable income and tax has to be paid on that.
Currently, the basis of levy of MAT is on ‘book profits’.
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