Investor interest high in REITs but tax hurdles persist: ICRA

Even as the government's policy measures have bolstered investor interest in real estate investment trusts (REITs), lack of clarity on the tax structure remains a matter of concern, ICRA said today.
"The recent policy actions pertaining to REITs are a welcome measure and would help pave the way for introduction of REITs in the country, albeit with much delay. However certain tax disadvantages continue to prevail in the current structure, which can dampen the returns," ICRA Senior Vice- President Rohit Inamdar said in a statement here.
The Securities and Exchange Board of India (SEBI) introduced the final guidelines for establishing REITs in September 2014 following the draft norms in October 2013.

"The Government had provided certain tax sops to REITs in the Budget 2014-15. However, the progress at ground level was limited owing to lack of clarity regarding certain tax aspects," the rating agency said.
The Union Budget 2015-16 offered further tax incentives to REITs extending the pass through status to rental income earned by the REIT from its own assets.
Further, the Budget rationalised the capital gains applicable for sponsors to an extent by providing exemption from long-term capital gains (subject to payment of securities transaction tax) on the REIT units received in lieu of shares of Special Purpose Vehicles (SPVs) thus bringing it at par with divesting stake in an IPO.

"Given that the profit arising on exchange of shares of SPV in lieu of units of REIT is notional in nature, the presence of MAT at this stage had been a deterrent for sponsors. Thus, the deferral of the tax liability to the time of eventual sale of the units is a positive step and is expected to give a boost to REITs," Inamdar said.

However the tax exemption to sponsor has been provided only in case of transfer of shares in the SPV in lieu of REIT units, he said.
"The direct transfer of assets by the sponsor to the REIT would continue to attract tax at applicable rates. Direct ownership of assets provides a tighter control over the asset to the REITs in addition to eliminating future tax incidences on account of dividend distribution at SPV level.

"However, given that it would result in a higher tax instance for the sponsors, it may not be the favourable route for REITs. This coupled with stamp duty and registration costs could lead to an increase in acquisition costs for REITs and thus a compression in cap rates," Inamdar said.