Developers in no mood to embrace Reits despite Budget sops

While the government may have moved a step closer to the launch of Real Estate Investment Trusts or REITs by giving certain exemptions in the Union Budget, developers and tax experts believe that some glitches still exist for the launch of the instruments.

REITs are like mutual funds, which can be listed and traded on stock exchanges. They are tax efficient as they need to distribute majority of their income as dividends.

In the Union Budget, finance minister exempted capital gains for the sponsors at the time of listing units of REITs and gave pass-through of rental income on assets held by REITs to unit holders.

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But there is no clarity on minimum alternate tax (MAT) and dividend distribution tax (DDT) – both could be the biggest dampeners in launching REITs, say developers and tax experts.

“Internationally, there is no MAT or DDT. We will have to see whether investors find domestic structures attractive or not. It depends on how investors look at tax implications,” said Rajeev Talwar, executive director at DLF which has ‘REITable’ assets.

Sunil Hingorani, director (finance) at K Raheja Corp, one of the largest owners of commercial properties in the country, elaborates.

“These (exemptions) don’t do anything. When you are transfering assets to REIT, holding companies attract MAT on 100% of notional gains,” Hingorani says.

He adds that since companies distribute entire profits, there is a lot of tax leakage.

Punit shah, co-head of tax at KPMG says the exemptions announced by the FM becomes irrelevant since MAT liability is triggered twice – once at the sponsor level when he transfers shares to REIT and secondly when they sell units of REITs.

“This could act as dampeneres,” he said,

He said the FM has not clarified on stamp duty, which is a state subject, too.