Budget 2020: InvITs, REITs Less Lucrative As Unitholders To Pay Tax On Dividends

The Narendra Modi government decided to tax dividends received by unitholders of real estate and infrastructure investment trusts, putting at risk fund-raising plans of developers and road-to-port builders looking to monetise assets through such instruments.

InvITs and REITs pool in assets to raise funds from unitholders. Under the existing structure, the dividends paid by such trusts were exempt at all three levels.

• Special purpose vehicles holding assets don’t have to pay tax on dividends distributed to InvIT/REITs, subject to certain conditions.
• InvITs and REITs are exempt from tax on dividend earned from the SPVs.
• Unitholders of InvITs and REITs are exempt from paying any tax on dividend earned from the trusts.

Finance Minister Nirmala Sitharaman in Budget 2020-21 scrapped the dividend distribution tax for companies and shifted the burden on to investors. While nothing changes for SPVs and the trusts as they still won’t pay tax, unitholders of InvITs and REITs are no longer exempt. They will now pay tax on the dividend income at the applicable income tax rate.

“Existing investments in InvITs will be substantially impacted by the proposed amendment, given that such investments have been structured with a certain tax impact in mind,” Law Firm Nishith Desai Associates said in a post-budget note. It’s likely to result in significant heartburn for existing investors in InvITs, it said, as future investments in such trusts would be seen to be commercially unattractive or unfeasible.

Also, REITs and InvITs while distributing the dividend income to non-resident and resident unitholders, according to a KPMG report, will withhold 10 percent as tax deducted at source.

Five public infrastructure trusts have so far raised about Rs 40,000 crore. According to a July report by Crisil, InvIT issuance could grow fivefold to Rs 2 lakh crore in two years. While India’s only listed REIT raised Rs 4,750 crore, Crisil estimated that the nation’s top 10 developers could raise as much as Rs 1.5 lakh crore from REITs by monetising 184 million square-feet-portfolio.

Business Trust Definition Extended

To make the tax treatment uniform across REITS and InvITs, Union Budget 2020 extended the definition of business trusts to include unlisted REITs and InvITs.

The current definition of business trusts only includes those InvITs and REITs whose units are listed on a recognised stock exchange. These trusts get the benefit of a pass through status—only the investor has to pay tax and not the fund.