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As Business Trusts gain acceptance for real estate and infrastructure investments, ensuring parity in tax treatments with corporate entities becomes imperative, writes Grant Thornton Bharat's Shabala Shinde.
Aligned with the priorities of Amrit Kaal, particularly focusing on ‘Infrastructure and Investment,’ Business Trusts ie., Infrastructure Investment Trusts (“InvITs”) and Real Estate Investment Trusts (“REITs”) play a crucial role in channelling investments and have demonstrated their value by delivering stable returns and attracting substantial investments.
Business Trusts raise funds from investors to hold Special Purpose Vehicles (‘SPVs’) in real estate and infrastructure. A taxation framework that encourages efficient fundraising, asset migration, and consolidation for Business Trusts is essential.
The current taxation regime provides pass-through for rental income, interest, and dividends from SPVs, taxing them in the hands of investors at applicable rates, with exemptions for dividends from SPVs not under the new tax regime. Capital gains on the transfer of SPV shares and other income are taxable at the Business Trust level.
Business Trusts attract institutional investors, high-net-worth individuals, and foreign investors seeking stable returns, regular income, and lower risk compared to direct investments, making them a preferred vehicle for monetising developed assets and freeing up capital for developers.
The primary expectation, therefore, revolves around improving funding efficiency. Currently, notified sovereign wealth funds and pension funds investing in InvITs receive tax exemptions on long-term capital gains and income if investment is made before March 31, 2025. Extending this deadline to March 31, 2028, would allow more investors to benefit, enabling sustained investments and fostering a stable, growth-oriented environment for the infrastructure sector.
Recently, units of Powergrid Infrastructure Investment Trust were notified as eligible investment for certain charitable and religious trusts. These charitable and religious trusts are currently permitted to park their surplus funds in notified investments, which inter alia include public companies, including those engaged in infrastructure development.
Expanding this exemption to other Business Trusts would facilitate diversified investments and enable efficient fund raise promoting competition and sector growth. Another avenue would be inclusion of investments in units and debt securities of Business Trusts as eligible investments for claiming exemption from long term capital gains. An influx of capital into the infrastructure and real estate sector would boost essential projects and enhance the country's overall development landscape.
From an investor standpoint, achieving parity in tax treatment would significantly enhance investments in Business Trusts. Harmonising the holding period for units of Business Trusts with listed securities by reducing the holding period to 12 months from 36 months would align their tax treatment with those of listed securities, creating a more equitable investment landscape.
Further, aligning the tax rates on interest income for Foreign Portfolio Investors (FPIs) with those for other non-resident investors is also crucial. At present, Business Trusts withhold tax at 5% on distributed interest income to non-residents, but FPIs must offer this income to tax at 20%, creating a disparity. Reducing the tax rate to 5% for FPIs would level the playing field, making them more competitive. Incrementally, extending the beneficial 5% withholding tax rate for debt raised by Business Trusts, and applying this rate to all non-resident investors, including FPIs, would further encourage debt financing.
As Business Trusts gain acceptance for real estate and infrastructure investments, ensuring parity in tax treatments with corporate entities becomes imperative. Current provisions do not allow subsidiaries of listed Business Trusts the same tax benefits for carrying forward tax losses as subsidiaries of listed companies. Amendments to include subsidiaries of listed Business Trusts within the definition of companies that can carry forward and set off losses would ensure equitable tax treatment.
Extending tax neutrality to transfers between Business Trusts and their SPVs would simplify reorganisation processes, promote operational efficiency, and foster business growth. The taxation regime should also provide for certainty on some other aspects relating to buyback/ redemption/ reduction of units, liquidation/ dissolution of Business Trusts.
A key request has been to clarify tax deferral on asset transfers to Business Trusts. Currently, it's unclear if tax exemptions for transferring shares to Business Trusts apply to all shareholders or just sponsors. Confirming that the tax deferral applies to all shareholders would facilitate efficient acquisition of new SPVs.
Lastly, the tax treatment of subordinate units presents an issue. Unlike securities issued by companies, converting subordinate units to ordinary units in Business Trusts may currently be taxed. Ensuring tax neutrality for this conversion would create a fair and consistent tax environment.
The regulatory and tax frameworks have evolved to provide essential stability and stimulate necessary funding. In the context of fast-paced businesses and dynamic macroeconomic environments, it is crucial to adapt tax laws to ensure an effective environment for investors and businesses. Meeting these expectations will enhance funding and tax efficiency for Business Trusts and investors, fostering growth and creating a more competitive investment landscape, ultimately driving economic progress and inclusive growth.
This article first appeared in CNBCTV18 on 23 July 2024.