Tax glitch could temper India Inc’s interest in REITs, InVITs

India Inc may not readily jump onto the REITs/InvITs bandwagon and take up the role of sponsors of such trust vehicles with gusto.

This is because the sponsors will not get any long-term capital gains tax exemption when they decide to sell the units received by them from the REIT/InvIT in lieu of the shares transferred to these trusts.

REITs and InvITs are structured as trusts and assets are held by an independent trustee on behalf of unit holders. Simply put, the companies promoting REITs/InvIT will have to pay 20 per cent tax (with indexation benefits) on the long-term capital gains made on sale of units. The companies could opt for a tax rate of 10 per cent, but without indexation benefit, which factors in the inflation during the holding period.

Under SEBI norms, sponsors have to hold at least 25 per cent of the units in any REIT or InvIT for the first three years, and at least 15 per cent thereafter.

On the other hand, any unit holder selling the units of REITs/InvITs for more than a year need not pay any long-term capital gains tax on units sold through the stock exchanges.

The absence of tax breaks for the sponsors on par with those available to unit holders is likely to dampen the enthusiasm of companies in setting up REITs/InvITs, say industry observers.

A developer transferring its holding in the concessions or special purpose vehicles (SPV) to an InvIT would have to pay capital gains on the entire benefit at the time of selling of the units, Virendra D Mhaiskar, Chairman and Managing Director of IRB Infrastructure Developers, told BusinessLine .

This would take away a large value of the gains and is expected to be a big pain point, he added. Although there will be a tax cost for REITs, this may still not dampen the popularity of this product among retail investors, say experts.

However, Mridul Upreti, Chief Executive Officer, Segregated Funds Group, Jones Lang LaSalle Investment Advisors Pvt Ltd said the tax issue cannot be correlated with the popularity of these two products.

Investors are more likely to be guided by parameters such as liquidity and returns and compare them with debt products, he said.

Gaurav Karnik, Tax Partner, Ernst & Young LLP, said there will be a tax cost for REIT structures. He also highlighted that the Revenue Department was yet to clarify on the tax treatment in situations where the sponsoring company was a minimum alternate tax paying entity.

 Many experts are also sceptical about the success of REITs in a country with black money-driven real estate industry.

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