MUMBAI: Real estate developers and private equity funds which were planning to set up Real Estate Investment Trusts (REITs) have shelved their plans fearing that the Minimum Alternate Tax (MAT) would make these investment vehicles unviable.
As many as 12 entities were planning to set up REITs and list it on the domestic capital markets and these proposals are now on the backburner, said a number of tax experts involved in the nowpostponed listing plans. Four people ET spoke to, advisors and tax experts who advise almost all the real estate companies and PE funds which were planning to raise funds through REITs, said fear of MAT as well as other tax issues had put a spoke in the wheel.
"Many players, including Blackstone, Embassy, Barring, Embassy Group and DLF amongst others have shelved their plans to set up REITs, whether or not they say it publicly," said an expert close to the development. This comes at a time when the Income Tax department's plans to impose MAT on foreign portfolio investors (FPIs) has revived, at least outside India, the fear that this country's tax authorities have a taste for aggressive tax enforcement.
real estate developer or a PE fund (the sponsor of the proposed REIT) might have to pay 20% MAT at the time of transferring the assets to the REIT. MAT could be levied for the second time if the player sells one of the properties held by the REIT.
"Tax department doesn't realise that REIT is a yield product and that investors would get benefit of appreciation of assets as well. If you levy 20% tax (MAT) just for transferring assets to a REIT, then it becomes unviable," said Vivek Mehra, partner, tax M&A, PwC.
"The key hindrance in the path of REITs continues to be the tax implications, especially the MAT which is applicable for the sponsors while transferring the (assets) to the SPV (special purpose vehicles) as well as the (applicability of MAT) to the sale of units of the REITs," said Punit Shah, cohead of tax at KPMG. Industry officials also say that there is lack of clarity on whether or not the foreign investors would be allowed to invest in REITs.
"Currently, there is no clarity on permissibility of FDI/FPI investments in a REIT. Also, there is no tax pass through for the foreign investors on the capital gains earned by the REIT, which can be a big deterrent to foreign investment into the REIT, even when it is permitted," said Shah. An analyst said even if the government were to allow FPIs to invest in REITs, few would do that due to the stance on levying MAT on capital gains.
Dividend Tax, Stamp Duty Hurdles
They also that apart from MAT, there are other concerns around REITs as well like the dividend distribution tax and stamp duty. According to the current rules, a tax of 15% is levied on dividends. They say that while for an average listed company dividend is around 1% of the market price of its shares, in case of REITs the same could be around 12%.
This is because for REITs, rental income from the properties that constitute the REIT becomes dividends for the unit holders. For investors in REITs the dividend income is a significant attraction unlike in the case of shares where the main driver is potential capital gains. Thus the 15% dividend distribution tax means that the investor's net return would come down substantially.
Industry experts says that even if the government reduces the DDT rate for REITs, their total revenue collections would be more in absolute terms as the amount that REITs dish out as dividends is higher than that of listed companies. Many sponsors are also demanding waiver on stamp duty. The current regulations make the payment of stamp duty and registration of properties compulsory for any player before it sets up a REIT.
In India the transaction cost, that mainly includes stamp duty on real estate could be anywhere between 5-12% compared to 4-6% in Singapore, according to a recent report by CBRE. "Burdensome stamp duties could hinder setting up REITS," the report read.
REITS could list in Singapore
Expecting that REITs would become a reality many PE funds have accumulated commercial real estate assets. Industry trackers say that many of these players are now looking at Singapore for listing their REITs.
"We are continuing with our development and acquisition plan despite no clarity on MAT, as we have kept both India and Singapore options open for our 2016 target for REIT listing. At that time, whichever market is more tax efficient for shareholders' value creation we'll move in that direction," said Raj Menda, Managing Director, RMZ Corp.
RMZ Corp, which counts Qatar Investment Authority and Barings Private Equity Partners among its investors, has a portfolio of over 10 million sq ft of rental income assets. Some of the other potential candidates for REITs, based on their rental income earning assets portfolio, include DLF, Embassy Property Developments, Shapoorji Pallonji Group, KRaheja Corp, Tata Realty Infrastructure, Panchshil Realty and Bagmane Developers.
A person who is privy to Embassy-Blackstone's plans said MAT is holding them back. "Everyone's first desire is to float REITs. It is a great opportunity for domestic REITs. What would be the point if all this money goes out of India to say, Singapore," he said.