Real Estate Investment Trust (REIT)
Globally REIT
is well developed phenomena, serving dual purpose of providing investor with
alternative investment avenue, being real estate properties and providing
developer or private equity fund avenues of exit, thus enabling them to utilise
their existing funds in other projects. Primarily these assets should be rent
generating properties.
In line with
global structure, Government has come with REIT proposal to provide Developers
with an option to retrieve funds tied up in existing Completed Projects.
Post
Transition to REIT Regime, following structure will evolve –
1.
A trust will be formed with
Developer being sponsor of the trust
2.
For an investment made by Developer
in SPV, Trust will issue its units to Developers in lieu of Investment in SPV.
Thus Developers will hold units in Trust and Trust will hold investments in
SPV.
3.
Post that Trust will bring IPO
of units, list the units at Stock Exchange and in the process of IPO, developer
will offer its units for sale.
SEBI-
Real Estate Investment Regulations (REIT)
S.No.
|
Particular
|
Regulations
|
1.
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Investment by REIT
|
1. Not less than 80% of value of REIT assets shall be invested
(either directly or through Holdco or SPV) in competed and Rent generating
properties
2. Not more than 20% of value of REIT assets shall be invested in
specified assets.
3. REIT shall hold at least 2 projects, either directly or through
Holdco/SPV, with not more than 60% of the value of assets in one project
4. The Word “Project” has not been defined in the Regulations
5. A REIT shall not invest in units of other REIT.
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2.
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Income Criterion
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1. Not less than 51% of revenue of REIT, Holdco and SPV, other than
gains arising from disposal of properties shall be , at all times from
rental, leasing and letting real estate assets or any other income incidental
to the leasing of such assets.
|
3.
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IPO conditions
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1. Value of all assets owned by REIT shall not be less than 500 Cr
2. Offer size is not less than 250 Cr
3. Minimum Public float
a) If Post issue capital value of REIT at offer price is less than
Rs. 1600 Cr, minimum 25% of units (based on post issue) shall be allotted to
public
b) If post issue capital value of RETIR at offer price is Rs.1600 Cr
or more, the value of units offered to public shall be at least equal to 400
Cr
c) If Post issue capital value of REIT at offer price is Rs. 4000 Cr
or more Cr, minimum 10% of units (based on post issue) shall be allotted to
public
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4.
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Income distribution
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1. Not less than 90% of net distributable cash flows of SPV be
distributed to REIT or Hold Co.
2. Holdco- 100% of cash received from SPV and 90% of cash generated
by Holco on its own be distributed to REIT
3. Not less than 90% of net distributable cash flow of REIT shall be
distributed to the unit holders
4. Above said distribution shall be made not less than once in every
6 months in financial year
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Taxation Aspects- REIT
The taxation
aspects are covered for following entities
1.
Sponsors
2.
Special Purpose vehicle (SPV)
3.
REIT
4.
Investor
1.
Sponsors
a)
Capital gains on Exchange of
shares of SPV with units of REIT
i)
Such exchange will not attract
Capital gains- exempt u/s 47(xvii)
ii)
The cost of shares of SPV will
be taken as cost of units of REIT (For computing capital gains, in future, if
any)- u/s 49(2AC)
iii)
U/s 2(42A)(hc),the holding
period of units of RIET will include holding period of shares of SPV.
iv)
Tenure of long term asset
-Section 2(42A) is amended to provide that for security listed on stock
exchange, holding of 12 month is required to classify them as long term capital
asset. Security is defined as per section 2(h) of Securities Contract
Regulation Act as under:-
i)
shares, scrips, stocks, bonds,
debentures, debenture stock or other marketable securities of a like nature in
or of any incorporated company or other body corporate
ii)
Derivative
iii)
Units or any other instrument
issued by any collective investment scheme to the investor in such scheme
From said definition of
Security, it is not aptly clear that whether UNITS of REIT will be covered
under existing definition or needs amendment.
If UNITS of REIT are not
covered above, the holding period of same will be 36 months or more to be
classified as Long term capital asset.
b)
Capital gain on sale of units
on the floor of stock exchange (STT is paid)
i)
If units are long term capital
asset, then capital gain arising thereon will be exempt from tax u/s 10(38).
ii)
If units are short term capital
assets, then capital gain will be subject to tax @ 15% u/s 111A
2.
SPV
a)
SPV will be subject to
corporate tax under Normal Provisions of Income Tax Act or MAT, as applicable.
b)
There will not be any TDS
requirement on Interest paid on money borrowed from REIT.
c)
SPV is exempted from DDT on
Dividend paid to RIET, provided REIT hold entire equity share capital of SPV,
u/s 115O(7)
d)
In case SPV has bought forward
losses, then such bough forward losses will lapse u/s 79, when REIT becomes the
shareholder of SPV, instead of Sponsors.
3.
REIT & Investor
Under Income Tax Act, for REIT taxation, a pass through Mechanism is
adopted, whereby income is made exempt in the hands of REIT and same is taxable
in the hands of Investor. The taxation of different types of income is
tabulated as under
S.No.
|
Income
|
REIT
Taxation
|
Investor’s
taxation
|
1.
|
Dividend
from SPV
|
Exempt from
tax u/s 10(23FC)
|
Exempt from
Tax u/s 10(23FD)
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2.
|
Interest
From SPV
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Exempt from
tax u/s 10(23FC)
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Taxable u/s
115UA
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3.
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Rental
Income from properties directly owned by REIT
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Exempt from
tax u/s 10(23FCA)
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Taxable u/s
115UA
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4
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Interest,
other than from SPV
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Taxable @
30%
|
Exempt u/s
10(23FD)
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5.
|
Short Term
Capital gain (STCG) on sale of property
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Taxable @
30%, other than STCG on listed shares traded on stock exchange, which are
taxable @ 15% u/s 111A
|
Exempt u/s
10(23FD)
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6.
|
Long Term
Capital gain (LTCG) on sale of property
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Taxable @
20% u/s 112, other than LTCG on listed shares traded on stock exchange, which
are exempt u/s 10(38
|
Exempt u/s
10(23FD)
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7.
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Sale of
units of REIT on stock exchange
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Not
Applicable
|
Long Term
capital Gain exempt u/s 10(38) and short term capital gain taxable @ 15% u/s
111A
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Important
Point – The dividend paid by SPV is exempt in entire chain
a)
Neither subject to DDT at SPV
level
b)
Not taxable in the hands of
REIT
c)
Not taxable in the hands of
Investor.
