Government proposes tax on REITs, InVITs

New Delhi: Seeking to widen the tax base, the government proposed to tax income distributed by Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InVIT) (commonly referred to as business trusts) in the form of debt repayments at the hands of unit holders.

"It is proposed to tax distributed income by business trusts in the hands of a unit holder (other than dividend, interest or rent which is already taxable) on which tax is currently avoided both in the hands of unit holder as well as in the hands of business trust," Finance Minister Nirmala Sitharaman said in her Budget speech.

The move is aimed at widening the tax base. Explaining the move in the memorandum of the Finance Bill, the government said that interest, dividend and rental income have been accorded a pass-through status at the level of business trust and are taxable in the hands of the unit holder.

"However, in respect of the distributions made by the business trust to its unit holders which are shown as repayment of debt, it is actually an income of unit holder which does not suffer taxation either in the hands of business trust or in the hands of unit holder," it added.

The government said the dual non-taxation of any distribution made by the business trust, which is exempt in the hands of the business trust as well as the unit holder, is not the intent of the special taxation regime applicable to business trusts. Therefore, "it is proposed to make such sum received by unit holder taxable in his hands."

Hemal Mehta, Partner, Deloitte India, said the amendment proposed for REIT/InVIT related to distribution by manner of 'repayment of debt' to the unitholders is now covered under the ambit of taxation as other income (net of cost of acquisition of the unit) which earlier was not captured.

"This was acting as an incentive for may sponsors. Any foreign investor receiving the said distribution will be taxed at 40 per cent plus surcharge," Mehta said.