FM Jaitley Removes DDT Barrier On REITs

Finance Minister Arun Jaitley’s proposal to stimulate housing activity got a big boost when he said that to facilitate investments in Real Estate Investment Trusts (REITs) “I propose that any distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to Dividend Distribution Tax (DDT). With this statement relief was provided to a number of large builders who had been lobbying with the finance ministry since the past two years or so.

Shares Gain
Shares of developers such as Puravankara Projects and Sobha were trading with gains after the announcement. Puravankara was up 1 per cent at Rs 45.05, Sobha rose 2.85 per cent and was trading at Rs 238, but Prestige Projects was down 3.07 per cent at Rs 150.

The budget announcement of doing away with DDT for REITs comes a month after the market regulator - Securities and Exchange Board of India (SEBI) - had issued a draft paper containing fresh norms for the public issue of REITs. In its draft paper, SEBI had proposed that the allocation in the public issue should be maximum 75 per cent to qualified institutional buyers (QIBs). But for other investors, there should be at least 25 per cent allocation. The paper suggests that the investment manager can allocate up to 60 per cent of the portion available for allocation to QIBs to anchor investors, subject to certain conditions.

What Is REIT?
The REIT works as a mutual fund by pooling funds from several investors and investing in real estate on their behalf. Income earned by it could be through rentals or capital gains or both and gets distributed to unit holders. In the story titled The REIT Way To Invest, Saurabh Chawla, senior executive director, Finance, DLF, had pointed out that 40-50 per cent of cash flows generated by the developers is currently taxed so why should anyone launch REITs in its current form.

Although market watchdog SEBI came out with guidelines for REITs in September 2014, not a single REIT offering has so far come from any player. According to Hemant Tikoo, Chairman, Experion Developers, three or four things if implemented can push REITs. “REITs should be made a pass through structure. While rental income is a pass through, capital gains on sale of assets/SPV is not a pass through. Stamp duty on transfer of shares of SPV or commercial assets from developer to REIT should be exempted,” says Tikoo whose Experion is a FDI-funded developer. He says the Dividend Distribution Tax by SPVs to REITs should also be exempted and transfer of assets in lieu of units of REITs should have tax deferral provisions.

Expert Take
DDT has been the biggest concern for REITs in India. Rajesh Narain Gupta, Managing Partner, SNG & Partners recently told BW Businessworld that if DDT is applied and thereafter the withholding tax is also applied as per the current norms there will not be any interest in REITs.

In the current form, the SPV will pay tax on its profit which is corporate tax. Out of the balance profit, if a dividend of another 22 per cent is to be paid, what remains is almost half of the original cash flows. Alternatively, if the asset is first moved into a trust, then stamp duty has to be paid on asset sale which is around 7-10 per cent. On the balance, DDT gets paid. According to another expert, the road map for foreign investment in REITs also requires more clarity. “Under the extant norms, FDI is not permitted in entities carrying on real estate business. Although the Union cabinet gave its approval for foreign investments in REITs on 6 May 2015, no formal notification under the FDI policy has been issued so far”, he had said.

Commenting on the announcement, real estate consultancy firm Colliers International India said that DDT was considered as one of the biggest hurdles left in making REITs financially viable for Indian commercial stakeholders. “We may see introduction of REITs in the Indian market soon,” said Colliers International India.