REITs (Real Estate Investment Trust) in India - Tax implications

Tax implications on REITs

Why will any investor invests in any venture ? One of the answer is to get a good return. The term GOOD depends on perception. I see 12% net of tax as a good return over a period of 6-9 months, some see this as 8% net of tax for the same tenure. 

Thus any person, while calculating the return on investment will consider the tax impact on the income generated from the return. If TAX element is not calculated / considered properly, the results screw up the happiness of the investors.

Investors in REITs would like some favorable tax treatment so that this remains an attractive route for them to put money as compared to other options present in the market.

Tax treatment of REITs should be made in an efficient manner so that TAX component will not eat into the return generated thereon and if that is the case this will not be any good avenue for the investors to park their money.

Below are few aspects of taxation of REITs which needs to be addressed by the forth coming budget [which will happen sometime after elections results of 2014 are declared].

Dividends

Dividends received by the investor from companies as well as mutual funds are tax free in their hands. 

Now with REITs entering the league as a separate instrument, the question is whether the taxation of the dividend received from this instrument will be liable for the same treatment as of dividends. If this is not the case then the amount received would have to be taxed in the hands of the investor which would put a burden on them. Further, if this amount is o be included as part of income for computing tax based on slab rates, the investors end up paying too much of tax. This is owing to the nature of REITs, most of the primary investors in REITs will he high net worth individuals who are already in higher tax bracket.

Capital gains benefit

There are favorable provisions related to the investments into equities and equity oriented mutual funds when it comes to capital gains earned on these instruments if the gains there on are of long term in nature [holding period being more than 12 months]. 

In case of the REITs there are no clear guidelines on what would actually be considered as the nature of the instrument and how would this be taxed. 

This has importance because if there is a capital gain that is earned at the end of the day when the investor goes to sell the investment and if the impact here is negative then this could dent the overall returns from the investment. 

Securities transaction tax

The nature of the REITs is such that it will be listed on the stock exchanges wherein it will provide investors with an option to actually trade in them and in which case this trading may invite securities transaction tax. 

In the absence of clarity of tax matters on these issues, there is very little chance that an investor is going to be attracted towards a REITs in the form that has been proposed. The entire effort of earning returns in the investment could be negated by the tax position. 

This tax angle will be key before investors invest in them. Unless there is a beneficial way in which this is actually dealt with it could turn sentiment against REITs which could be difficult to correct at a later stage hence the important thing is to get the details right the first time around.

So, let’s keep our fingers crossed and wait for the Finance Minister [New...!] to come up with some provisions in the budget.