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Reits envisage transferring to a trust the completed asset or the shares/interest in the SPV that owns the assets.
The transfer of assets or shares of the SPV to the Reit will attract stamp duty and this might be a significant cost, even before investors record any income.
There is a genuine case to argue this transfer should be subjected to a nominal or minimal stamp duty, akin to the transfer of loans to a securitisation trust in a securitisation transaction, as it is in the nature of a financing transaction. In the case of transferring shares of the SPV, it should be possible to reduce the stamp duty to nil if the shares are dematerialised. This, however, won't be the case if the transfer is of the actual asset. Thus, the Reit structure could turn against the transfer of the actual asset to the Reit, unless the prohibitive impact of stamp duty is reduced. As this is largely a state-level subject, states should be brought on board; they should facilitate the success of this structure. The resultant boost to real estate should be recognised.
The tax impact of Reit investment is lower if the asset is owned by the Reit directly, not by the SPV. Therefore, in terms of providing returns to investors, owning the asset directly is preferable, provided the stamp duty impact is reduced. That this structure should succeed and the global experience should be made available in India cannot be overemphasised.Another issue is computation of capital gains on the developer, through which the developer receives a mix of units and cash from the Reit. Thereafter, the cost of acquisition of the asset at the hands of the Reit has to be clarified for computation of capital gains when the Reit eventually sells the asset.
Current tax provisions do not go far enough to address these issues.
Daksha Baxi
Executive Director (taxation), Khaitan & Co
Executive Director (taxation), Khaitan & Co
