Taxing Income Distribution In The Form Of Debt Repayment Is A Proposal That Would Affect The Appeal Of REITs To Unitholders.
February 2023: According to Embassy Office Parks REIT, the market is currently uncertain due to the proposal to tax income distributed by business trusts to unitholders in the form of debt repayments.
As a result, the industry is considering making a presentation to the government on the merits of this investment vehicle.
The suggestion has an impact on 40% of its current distribution, according to the Bengaluru-based company. India’s first listed REIT is the nation’s Embassy REIT (Real Estate Investment Trust).
Finance Minister Nirmala Sitharaman suggested taxing “distributed income by business trusts in the hands of a unit holder (other than dividend, interest, or rent which is already taxable) on which tax is currently avoided both in the hands of the unit holder as well as in the hands of business trust” in her speech on the budget on February 1.
The goal of the proposal is to increase the tax base for business trusts like REITs and InVITs (Infrastructure Investment Trusts).
An InVIT consists of a portfolio of infrastructure assets, such as roads and electricity transmission assets, whereas a REIT consists of a portfolio of commercial real estate assets, the majority of which are already leased out.
The distributions made by the business trust to its unit holders, which are represented as debt repayment, are in reality a unit holder’s income, which is not subject to taxation by either the business trust or the unit holder. Therefore, the government has suggested making the money the unit holder receives taxable in his hands.
The recent Budget statements have caused some market uncertainty over the taxation of one of the dividend components, but only about 40% of Embassy REIT’s existing payouts are affected, the company stated in a statement.
According to the report, REITs are a total return product that combine stable distributions with potential gains from capital appreciation fueled by growth levers.
Given the product’s existing profitability and appeal, particularly to retail investors, Embassy REIT and other industry participants are reviewing the next steps, including appropriate representations.
The company reported that it just made 100% dividends for the 15th straight quarter, bringing the total to Rs 7,300 crore.
“Our best-in-class unit-holder registry includes high net worth individuals (HNIs), retail investors, life insurance, global mutual funds, local mutual funds, family offices, and sovereign wealth funds.
By continuing to act as we have both prior to and beyond our listing, we will continue to serve the interests of all of our stakeholders:provide the best office solutions to the best businesses in the globe,” it claimed.
Interest, dividend, and rental income have been given a pass-through status at the level of business trust and are now taxable in the hands of the unit holder, according to the government’s explanation of the action in the memorandum of the Finance Bill.
The document continued, “However, with regard to the distributions made by the business trust to its unit holders that are shown as repayment of the debt, it is actually an income of the unit holder that does not incur taxation either in the hands of business trust or in the hands of unit holder.
The government said that the purpose of the unique taxing regime that applies to business trusts was not to double non-tax any distribution made by the business trust, i.e., which is exempt in the hands of both the business trust and the unit holder.
Since this sum was received by the unit holder, it is recommended to render it taxable in his hands.The memo said that these changes would be effective for the evaluation years 2024–2025 and afterwards.
According to the budget paper, a separate taxing regime was established for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs) under the Finance (No 2) Act, 2014. (commonly referred to as business trusts).
To deal with the difficulties of funding and investing in infrastructure, a unique system was established. The business trusts use stock or debt instruments to finance their investments in special-purpose vehicles.
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