New Delhi: Contrary to a promise made in the Budget for 2014-15, the proposed real estate investment trusts (Reits) might not get a full pass-through status.
Reits are listed entities investing in income-producing real estate assets, the earnings of which are mostly distributed to shareholders.
While Budget 2014-15 had announced pass-through status for these trusts, the Securities and Exchange Board of India (Sebi) announced the guidelines for Reits late last month.
Pass-through status means taxes on the income distributed by Reits to unit holders will be paid by unit holders and not the Reits. This was one of the major demands of those interested in coming out with Reits.
However, tax experts say a complete pass-through status has not been given to the trusts for the purpose of taxation. Provision for tax on Reits is contained in the Finance Bill, 2014.
Hemal Mehta, senior director, Deloitte India, explained the Sebi norms allow Reits to either acquire the shares held in a special purpose vehicle (SPV) by the developer or acquire the real estate asset directly under the trust.
If a developer transfers shares held in an SPV to a Reit, capital gains tax would not be immediately applicable. The developer would be liable to pay when he sells units of the Reit to investors, which may be retail investors on a stock exchange. At this time, capital gains tax would be payable by the developer on sale price of units minus indexed cost of holding of shares in the SPV.
Now, on these units held by investors, different kinds of income can be generated, which will be passed on by Reits to unit holders. These may be dividend, interest or capital gains.
If it is interest on units, then the SPV will pass it to the Reit, which will cut the withholding tax - 10 per cent in case of resident Indians and five per cent in case of non-residents. The unit holders will pay tax on such interest depending on their income slab and take credit of withholding tax. Non-resident will pay according to rules in his country, but nothing further in India. In this case, it is a some sort of a pass-through.