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REITs and InvITs in India have approached the government to reconsider the proposal in the Union Budget for 2023-24 to tax income distribution through the mode of repayment of debt. While REITs have emphasized their attractiveness and steady rise in acceptance by retail investors, tax experts believe that the government is attempting to bring parity in taxation of incomes for investors of REIT and InvIT by widening the tax bracket. As India has witnessed robust investor interest in REITs from a diversified investor base, the proposed tax change could have an impact on the growth of the market.
Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) in India have approached the government to reconsider a proposal in the Union Budget for 2023-24 to tax income distribution through the mode of repayment of debt. According to sources familiar with the matter, the budget has proposed that the distribution of income by REITs and InvITs in the form of repayment of debt will be taxable as other income, subject to marginal tax rates in the hands of unitholders.
Both REITs and InvITs are required by the Securities & Exchange Board of India’s regulations to distribute their cash surplus up to certain limits on a quarterly basis. These distributions typically consist of interest, dividend, or repayment of debt. While the distribution of income as dividend by these trusts continues to be exempt from taxation to unitholders, the interest component was already taxable.
The proposed tax change will impact all distributions by REITs and InvITs representing repayment of debt from the next financial year starting on April 1. This has led business trusts including REITs and InvITs to review their mode of income distribution to unitholders. Tax experts believe that the government is attempting to bring parity in taxation of incomes for investors of REIT and InvIT by widening the tax bracket to include "repayment of debt."
In their representation to the finance ministry officials, REITs have emphasized the attractiveness and steady rise in acceptance by retail investors as an investment product since the first Indian public listing in April 2019. They believe that any disruption with regards to taxation and retail investors’ returns may act as an impediment in the development of the market.
The government has made significant efforts to streamline the structure and regulations to ensure that the REITs market gains depth in India. The capital market regulator Securities and Exchange Board of India (SEBI) had notified the regulations governing REITs in 2014, and the market has witnessed three listings so far. For the quarter ended December, Mindspace Business Parks REIT approved the distribution of ?284.6 crore. Dividend, which is tax-exempt in the hand of unitholders, formed 91% of this while interest constituted 9%. Embassy REIT has announced a distribution of ?503 crore that included 45% of amortization of special purpose vehicle (SPV) debt, and Brookfield India Real Estate Trust’s 50% current distribution also falls under this category.
REITs in India have witnessed robust investor interest from a diversified investor base of over 1 lakh unitholders, including sovereign and pension funds, domestic mutual funds and life insurers, foreign portfolio investors (FPIs), family offices, high net worth individuals, and retail investors.
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