An earlier post on this blog had stated that the success of REITs in India would depend upon the availability of tax benefits to the REIT vehicle in the form of a tax pass-through.
The Economic Times reports that SEBI has made out a case to the Government seeking that REITs be taxed in the same manner as mutual funds. The news report states:
“The income-tax law now provides for a pass-through status for mutual funds and the income earned by the funds is tax-free. But depending upon the nature of the fund, any income distributed by the mutual fund attracts a distribution tax. The maximum rate of dividend distribution tax is fixed at 25%. However, unit holders do not have to pay tax on their dividend income. Sebi has recommended extending a similar tax treatment to REITs. This would mean granting them a pass-through status and exempting all income earned by REITs from tax.
Investors holding REIT units should also be spared from paying tax on dividends. Income distributed by the REIT would attract dividend distribution tax. Sebi, in its draft guidelines, has suggested that REITs should distribute not less than 90% of their net income after tax as dividends to the unitholders.”
Similarly, it is expected that capital gains tax would be chargeable on transfer of units in REITs similar to a transfer of units in a mutual fund. These tax benefits are likely to take shape in the upcoming budget, which would constitute an additional step in the establishment of a regime for REITs in India.