[Opinion] Enhanced Scope of Taxation for REITs/InvITs

Vishal Hakani & Neha Mehta – [2023] 148 taxmann.com 228 (Article)

Real Estate Infrastructure Trusts (‘REITs) and Infrastructure Investment Trusts (‘InvITs’) have gained popularity in recent times among investors as they offer the opportunity to invest in alternate asset classes. Also, the Income Tax Act, 1961 (‘Act’ or ‘ITA’) provides for special tax regime for REITs and InvITs (hereinafter referred to as ‘Business Trust’ collectively). The special regime was introduced in order to address the challenges of financing and investment in infrastructure and the real estate sector.

The Business Trust usually invests in special purpose vehicles (‘SPV’) through a combination of equity and debt. The provisions of ITA provide a pass-through status to a Business Trust in respect of following income received by it:

– Interest income
– Dividend income
– Rental income

The aforesaid income is taxable in the hands of unitholders whereas any other distribution received by the unitholder from a Business Trust is not taxable in the hands of such unitholders but would be taxed at the Business Trust level.
The distributions received by the Business Trust also have an element of repayment of debt and such repayment is not taxable in the hands of the unitholder (as it is not covered under the aforesaid heads of income which are accorded pass-through status). Further, for a Business Trust the repayment of debt is capital receipt and therefore cannot be considered as income. Accordingly, the repayment of debt is not taxable in the hands of either the unitholder or the Business Trust.

The distribtion of repayment of debt proceeds by a Business Trust to its unitholders were being made without any redemption of units and thus the cost of the unitholders remained intact. This offered undue advantage to the unitholders as they could claim higher cost base on subsequent redemption/secondary transfer of units. This has been plugged by the proposed amendement to Budget 2023.

According to the proposed amendment, any sum received by the unit holder of a Business Trust which is not in nature of interest, dividend or rental income (in case of REIT) and is not chargeable to tax in the hands of Business Trust, will be taxable as income from other sources, in hands of the unit holder.

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