Multiple Taxes Hindering REITs Growth in India

After clearing the Dividend Distribution Tax (DDT) in the last budget, industry stalwarts were betting high on the Union Budget 2017-18 to get much-needed clarity on REITs. However, not much happened on the ground level.

Back in the Budget of 2014-15, one of the major announcements that was envisaged to be the game-changer for Indian real estate was the approval for the Real Estate Investment Trusts (REITs) in India. Post the announcement, denizens came in favour of REITs as for the first time it was to enable investors with small appetite to invest in real estate. Unfortunately, till date, there has not been a single REIT listing largely due to the presence of multiple taxes.

Thus, it is high time now that the government realise the importance of REITs in improving the growth of real estate sector and economy at large.

So, what are the advantages of REITs?

Great for Small Investors: First and foremost, REITs offer a great investment opportunity to small investors as one can invest an amount as low as Rs 2 lakh. Additionally, it is also a more safer investment option promising decent return on investments.

Transparency: Being a non-organised sector, lack of transparency has plagued the real estate sector for quite some time now. However, with REITs, this issue will be resolved as the full valuation on a half-yearly and yearly basis is mandatory.

Less Risk: To ensure regular income to the investors, it has been mandated to distribute at least 90 per cent of the net distributable income after tax of the REIT to the investors at least twice a year.

Moreover, as per the guidelines, 80 per cent of the assets must be invested in completed projects while a mere 20 per cent will be in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities.

Lastly, REITs must invest in a minimum of two projects with 60 per cent asset value in a single project.

Understanding the current situation

Approved by the Securities and Exchange Board of India (SEBI), the REIT platform will attract funds from investors across the country. The money collected, thereby, will be invested in commercial properties to generate income.

A REIT will also need to be registered via an IPO or initial public offering. REIT units should get listed with exchanges and consequently traded as securities. Investors would be able to buy the units from either primary or the secondary markets.

The hurdles

Multitude of taxes have made REITs unattractive in India. For instance, when REIT sells shares of assets, the capital gain is taxable.Further, countries where REITs have been functional for long have been exempted from paying stamp duty while transferring assets to REIT’s holding company. Such tax benefits are expected to act like catalysts in making REITs more functional in the long run.

Final words

With market being stabilised, it is pertinent to make REITs attractive for investors by providing tax sops. It, undoubtedly, will open more channels for foreign funding in Indian real estate market.

While investors have been shouting at the top of their voices, the government has turned a deaf ear towards the issue. It is high time that the policy-makers now wake up from their deep slumber and make REITs more functional in India!

 

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