CII Recommends Capital Gains exemption on Transfer of Shares by Sponsor to REITs/InvITs

union budget_2015

Exemp REITs/ InvITs from MAT and DDT at SPV level: CII

The Budget 2014-15 notified the norms where Real Estate Investment Trust (REITs)/ Infrastructure Investment Trust (InvITs) was provided the ‘pass through’ status for the purpose of taxation to attract long-term foreign and domestic investors. Later, SEBI had put in place the regulations for listing of new business trust structure that would help attract more funds in a transparent manner into the realty sector. However, much needs to be done on the tax structures of this instrument for it to become more efficient for domestic as well as overseas investors, stated CII in a press release issued here today.

For sponsors to structure REITs/ InvITs, there is a need to exchange shares in Special Purpose Vehicles (SPVs) with units of REITs/InvITs. Such exchange of shares is in reality not a commercial transaction as the stakeholders of shares of SPVs are the same as unit holders of REITs/InvITs. Hence, there is no sound basis of taxing such an exchange in the absence of real income. Finance (No. 2) Bill, 2014 proposed capital gain tax on capital gains arising to the Sponsor on sale of REITs units held by the Sponsor (post listing of units). The Bill proposed deferment of capital gains tax on capital gains arising at the time of exchange of shares in SPVs with units of the REITs, and taxing the capital gains at the time of disposal of units by the sponsor. Currently, Sponsors / Promoters of listed companies enjoy the benefit of long term capital gain tax exemption where STT is levied / paid. CII has recommended that long term capital gains tax should be exempted for sponsors of REITs/ Invits.

Mr Chandrajit Banerjee, Director General, CII mentioned that “as exchange of shares is being done only to initialize REITs/ InvITs with assets, therefore such gains should be exempt from Minimum Alternate Tax (MAT) as well as this act of exchange is not a transaction and therefore should not be treated as such.  There could be a potential MAT liability on such transfer, and CII has suggested for an exemption from the potential MAT liability also on such cashless transfers, since there is no change in the ultimate economic owner of the asset.”

Further, since REITs are required to mandatorily distribute almost the entire annual income as dividends to unit holders, the underlying SPV would necessarily have to suffer the dividend distribution tax (DDT) liability when it distributes income to the REIT. “This results in a multiple layer of tax, since the SPV would suffer this DDT levy in addition to corporate income tax on its taxable income. Outflow of Corporate Tax and DDT will bring down the earnings for distribution.  Hence, SPV should be exempt from DDT on dividend distributed to REITs/InvITs”, stated Mr Banerjee. CII recommended that DDT exemption is imperative on REITs/Invit to provide an effective tax structure and therefore, DDT exemption should be extended to SPVs where REITs hold the minimum stake as required by the regulations.

CII has said that easier taxation rules could provide a fillip to REITs as a lot of global capital is looking at new investment opportunities and business friendly regulations would help attract more funds in a transparent manner into the real estate sector.

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