The real estate sector’s expectations of exemption for Real Estate Investment Trusts (REITs) from taxation on distribution of dividends were addressed by the finance minister in his budget statement but a successful India REIT market will require strong support from existing landlords and investors, as well as favourable market conditions. Also, the successful implementation and development of the REIT market in India will rest on a number of factors related to the regulatory environment, market conditions and issuers/investors..
At a time when the realty sector is struggling for alternate avenues of funding—other than traditional banks and financial institutions—and private players are sourcing institutional capital, enabling REITs to operate with ease is expected to act as a key enabler for capital markets in the country.
This exemption of Dividend Distribution Tax (DDT) for implementing investor-friendly REITs has been the most encouraging announcement for the sector in the country in recent times. Any distribution made out of the income of a special purpose vehicle (SPV) to the REIT will now not be subjected to any DDT. While the fine print on the announcement needs to be reviewed, it is hoped that having cleared this hurdle, companies will now come forward to set up REITs in India, which is expected to be a game changer for the industry.
The previous budget had also attempted to clear taxation impediments for India REITs, but had fallen short of industry expectations. Consequently, the industry had not seen the establishment of any REITs in India since the Securities and Exchange Board of India (SEBI) announced the final notification on them in October 2014.
In the previous budget announcements of February 2015, the Government had rationalised the capital gains tax for sponsors of REITs and accorded pass-through status to rental income. Later during the year, it had allowed REITs to be treated as eligible financial instruments under the Foreign Exchange Management Act (FEMA); and had also clarified on capital gains and Minimum Alternate Tax (MAT), but clarity was awaited on DDT. The latest proposal, however, is likely to lead to the establishment of the first REIT structure in India. Essentially, the pricing and quality of assets will be crucial for the successful launch of the India REIT market. They also need to be made attractive for investors, particularly for foreign investor groups.