After getting relief from capital gains tax and minimum alternate tax last year, developers now seek exemption from the dividend distribution tax (DDT) for real estate investment trusts (Reits) in the coming Budget, to make them attractive for investors. Despite tax concessions last year, Reits have not taken off.
Realtors say after paying almost 20 per cent DDT, rate of return on these units are not lucrative compared with other investments. Currently, after DDT, Reits give 6.5 per cent return to investors, which would not be viable to run Reits. This is so because that much interest rate could be easily earned in bank deposits. For instance, State Bank of India’s 5-10 year deposits draw an interest rate of seven per cent a year.
Hemal Mehta, partner, Deloitte Haskins & Sells, said: “Most amendments to the Reit taxation have been incorporated in the income tax Act, but the critical issue on DDT has not been addressed as yet.”
Property consultant CBRE, too, demands DDT exemption. “Despite several announcements relating to the taxation structure for domestic Reits in the previous Budget, they continued to fall short of industry expectations,” said Anshuman Magazine, chairman and managing director of CBRE South Asia, in a statement.
He said in its current form, imposition of DDT and stamp duties would lower the valuation of Reits, making the newly created structure unviable and unattractive for overseas as well as domestic investors.
“Essentially, the pricing and quality of assets will be crucial for the successful launch of the Reit market in India,” said CBRE.
The Securities and Exchange Board of India has allowed Reits to attract funds in a transparent manner into the realty sector.
Last year, the Budget had given them exemption from capital gains tax. However, after pressure from the sector, finance minister Arun Jaitley provided exemption from MAT on notional gains as well.
"I propose to provide for exemption from levy of MAT on gains and losses arising from exchange of shares with the units of a business trust Reits," he had said.
The liability under MAT will arise only on actual transfer of such units.
After this clarity, realty giant DLF announced plans to float Reits to raise Rs 6,000 crore over two years. Besides, a few developers from Mumbai had also said they would come out Reits.
Also, a joint venture between private equity firm Blackstone and real estate group Embassy had decided to shelve plans to list a $2-billion Reit in India due to tax issues.
“The tax structure would have made it quite unattractive,” Mike Holland, chief executive of Embassy Office Parks, had said.
The joint venture has 27 million sq ft of office assets. Its planned Reit was aimed at unlocking value in these assets.
In Reits, pooled funds are invested in specific projects. Reit unit holders earn returns from value appreciation or rental income of these projects.
Reits are similar to mutual funds, and can be listed and traded on stock exchanges. These have to distribute a majority of their income as dividend. Reits are required to distribute 90 per cent of their lease rental income to unit holders and, hence, DDT becomes important.