Union Budget 2023: Govt proposes taxation changes related to REITs, InVITs

Seeking to widen the tax base, the government on Wednesday proposed to tax income distributed by business trusts like REITs and InVITs in the form of debt repayments at the hands of unitholders.

"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 on Wednesday.

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 i.e. 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.

Colliers India CEO Ramesh Nair said the budget has brought in parity in taxation of incomes for REIT/InVIT unitholders by bringing in 'repayment of debt' under the tax bracket.

AS per the budget document, the Finance (No.2) Act, 2014 introduced a special taxation regime for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InVIT) (commonly referred to as business trusts).

The special regime was introduced in order to address the challenges of financing and investment in infrastructure. The business trusts invest in special purpose vehicles through equity or debt instruments.

"Keeping in mind the business structure, the special taxation regime under section 115UA of the Act, inter-alia, provides a pass-through status to business trusts in respect of interest income, dividend income received by the business trust from a special purpose vehicle in case of both REIT and InVIT and rental income in case of REIT," the document said.

Such income is taxable in the hands of the unit holders unless specifically exempted.

The Act provides any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by the business trust.

These amendments will apply to assessment year 2024-25 and subsequent assessment years, the document said.

While an REIT comprises a portfolio of commercial real assets, a major portion of which is already leased out, an InVIT consists of a portfolio of infrastructure assets such as highways and power transmission assets.