MUMBAI: Global institutional funds and industry associations are seeking an urgent review of the recent Union budget proposal to tax dividends in the hands of unit holders or investors of infrastructure and real estate investment trusts (InvITs and REITs) which were otherwise not taxable.
The move is likely to hit both global investment inflow into these assets and local retail investors’ participation, they said.
“This seems to be an inadvertent error, which needs reconsideration,” said top executive of a global fund operating in India. “InvITs and REITs should have been carved out separately. If it has been left out on purpose, it is a complete U-turn by the government.”
A consortium of leaders from international institutional funds and industry associations have made their representation to top authorities including the finance ministry, revenue secretary and top officials of the Central Board of Direct Taxes (CBDT) in two successive meetings.
They pointed out that InvITs and REIT are mandated by capital market regulator Securities & Exchange Board of India (Sebi) to pay out 90% of net distributable cash flows as dividends to unitholders. Hence, unlike all the other listed companies, they don’t have the option to retain surplus income for growth of their portfolio instead of distributing it as dividend, which would now be subject to tax and reduce the yield to investors.
Over the last several Union budgets, the government has been incentivising InvITs and REITs while acknowledging the need to rationalise the tax regime for them and developing a new investment asset class.
However, the Finance Bill 2020 proposes to levy tax on the dividend distributed by InvITs and REITs in the hands of the unitholders, which thus far was exempt from tax.
The country has four listed InvITs — two public ones listed in 2017 and two privately placed ones listed last year — and one REIT listed in April 2019, which have attracted investments from both domestic investors and global institutional investors.
The move to tax their dividends “is going to have a long-term impact on the investments in REITs or InvITs”, said Sigrid Zialcita, CEO of Asia Pacific Real Estate Association (APREA). “The step will project an unstable picture of India as an investment destination, especially in the real estate and infrastructure space that are at this point of time reeling under pressure. There are chances that the investments may be diverted elsewhere,” she said.
The dividend distribution tax will also restrain high net-worth individuals from investing in these instruments, Zialcita said.
Developers and institutional investors are concerned that the government has proposed to tax dividend of InvITs and REITs despite it has always acknowledged the need to avoid multiple levels of taxation, and the need to revive the economy while generating employment.
They claimed that the move could result in multiple stage taxation of these instruments.
“The proposed change in tax framework leads to multiple levels of taxation and is a retrograde step, discouraging future investments in InvITs and REITs,” said an infrastructure developer who was part of the meeting with finance ministry officials. “The inflow of foreign institutional funds this far was on the back of the existing tax framework and any withdrawal of exemption of tax will make it unattractive, making investors nervous about investments in India.”
It took more than a decade after Sebi initiated REIT regulations in 2008 for the first REIT to list in the country.
But taxing dividends would make the product unattractive and discourage future InvITs and REITs that may influence large foreign inflows and increased transparency in real estate and infrastructure sectors, along with deepening of capital markets in India, industry experts said.
According to them, the finance ministry has been over the last five years supportive and created a tax structure that was conducive for InvITs and REITs to become a reality.
The commercial real estate market in the country is likely to provide 294 million sq ft of space that can be listed under REITs, valued at $35 billion, from the existing office stock, property consultant JLL India had said in a recent report.
Rising transparency levels, progressive regulations, and a robust commercial real estate market in the country have made the segment a favourite among institutional investors who have allocated nearly $17 billion in the form of direct investments as well as through entity level investments from 2006 to 2019 in the office space.
Global investors, including Blackstone Group, CPPIB, Singapore's sovereign fund GIC, Goldman Sachs and Qatar Investment Authority, have been investing in Indian properties for the past few years. In addition to this, more funds are eyeing investment and alliance opportunities here.
The positive response to the country’s first REIT, Embassy Office Parks REIT, a joint venture between Embassy Group and Blackstone, has provided confidence to other realty developers with portfolio of income-producing commercial assets to list their commercial assets as REITs. Embassy Office Parks REIT has gained more than 40% since its listing on the Bombay Stock Exchange at Rs 300 per unit.
February 06, 2020