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How the tax equation changed for REITs and InvITs from April 1, 2020

By Ritu Shaktawat & Raghav Kumar Bajaj

Indian infrastructure funding trusts (InvITs) and real property funding trusts (REITs) have drawn investments from probably the most greatest global institutional buyers, sovereign wealth price range and pension price range. According to assets, since their advent in India, InvITs and REITs have together raised more than $3.6 billion of capital.

These cars (together known as ‘business trusts’) have important doable to assist the government in attaining its objectives of big infrastructure building and give a fillip to the economic realty marketplace within the nation.

Unlike other countries, India presented the framework for those structures slightly late. The regime may just no longer select up until the next steps were taken:

(i)income-tax law was amended via recognising ‘business trusts’ as tax move via cars (for dividend and passion income from its investments in a different function automobile (SPV));

(ii)investments were incentivised via providing concessional tax rate of 5% on passion up-streamed via the business trusts to non-resident buyers; and

(iii) tax exemption was allowed on dividends distributed via the SPVs which have been neither subject to a dividend distribution tax (DDT) within the hands of the SPVs (subject to conditions) nor any tax within the hands of the business trust and unitholders.

A tax deferral was also supplied to sponsors contributing stocks of the SPVs to the business trusts in lieu of gadgets thereof such that any positive factors on exit will only be discovered and taxed when gadgets are sold and no longer when the stocks are transferred to the SPVs.

After the adjustments presented within the Finance Act, 2020 (which gained Presidential assent on March 27, 2020 and is now in pressure), the query is – will those structures proceed to remain similarly attractive?

We analyse right here how the tax amendments may just probably impact those structures and the concerns to be saved in thoughts.

With effect from April 1, 2020, there was an overhaul of India’s dividend tax regime. Until now Indian firms were required to pay DDT and shareholders (aside from non-corporate residents) were exempt. Going ahead, the tax incidence will shift from the corporate to the shareholders.

In case of business trusts, dividends used to be exempt at every level (albeit subject to a few conditions), then again, as a part of the new dividend taxation regime, the government didn't announce any reduction specific to the buyers in business trusts in its Budget tax proposals, which raised questions relating to beauty of those structures.

There were divided perspectives on fairness of this tax alternate resulting in levy of tax on income which used to be exempt – some didn't to find it unfair as the government had rationalised the corporate tax rate itself previous last yr. To alleviate the larger concern with admire to taxable dividends, Parliament amended the tax proposals whilst approving the Finance Bill, wherein the taxability of dividends was made subject as to if or no longer the SPV has opted for the just lately announced concessional company tax regime.

If the SPV has opted to be taxed on the concessional company tax rate of 22% (towards the overall rates of 25%/30%), the dividends declared via the SPV can be taxable within the hands of the unitholders and the business trust would be required to withhold tax on the rate of 10% when distributing income representing dividends gained from SPVs.

If the SPV has no longer opted for the concessional company tax rate, then dividends would be exempt. The objective appears to be extending one receive advantages – both exempt dividends or concessional company tax rate on the SPV level.

With admire to the effective tax rate on dividends which might be taxable, buyers will have to note that whilst withholding tax is capped at 10%, there is not any corresponding modification to the availability which prescribes special tax rates for dividend income, which for non-residents is 20% (plus applicable surcharge and cess) and for residents, the dividend income can be taxable at abnormal rates (highest slab rate being 30% plus surcharge and cess).

One will have to also note that the higher rates of surcharge of 25% and 37% (presented last yr for non-corporate taxpayers) would no longer practice to dividend income.

Further, within the absence of any express carve out from the overall withholding tax provision, the SPVs can be required to withhold tax (on the rate of 10%) when distributing dividends to a business trust – although this can be a tax move via automobile with admire to such dividend income. Therefore, each business trusts and SPVs would be required to withhold tax at 10% and except clarified additional, this would result in cashflow problems.

From an general viewpoint, going ahead, the key structuring concerns would be- tax place of abode of the buyers, whether or not the SPV will have to go for the concessional company tax regime, and debt – equity ratio on the SPV level. With admire to the cashflow issue the place the SPV withholds tax on dividend distribution, one may just means the government for clarity or observe the process of obtaining a 0 withholding tax certificate.

(Ritu Shaktawat is Partner and Raghav Kumar Bajaj Principal Associate at Khaitan & Co. The perspectives of the authors in this article are non-public and don't constitute criminal/professional recommendation of Khaitan & Co.)

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