For REITs to take off in India, the government needs to provide clarity on the tax structure, says Anshuman Magazine, chairman and managing director of CBRE South Asia. The tax outgo is much less if a company is listed in India and Singapore, sans REITs, he says.
Under normal listing, the tax comes to 25 percent in India and 13 percent in Singapore, whereas under REITs it is around 50 percent, he says. He adds that foreign investors will only be interested if there is tax clarity on REITs.
According to him, capital gains from exchange of special purpose vehicle (SPV) share must not be subject to MAT.
Below is the verbatim transcript of Anshuman Magazine's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Anuj: What are the major tax issues in real estate investment trust (REITs) and how can those be solved?
A: No, in fact what has happened is we are expecting some clarifications on the tax side. So today if you were to do a REITs structure in India, taxation – the tax is less if you are listing in Singapore or listing in the Indian stock exchange. For example, if you are doing a REITs structure, you are paying almost 50 percent tax so it is 30+20 corporate tax and dividend distribution tax (DDT). If you were to just do a normal listing, the tax comes to 24 percent and if you were listing in Singapore it is 13 percent. So there is no incentive for anybody to get into a REITs structure. There are a lot of small things, the major one-two things are that there is a capital gains tax, if you are transferring your assets into a REITs structure.
The second is when you are selling assets to form a REITs structure, again there is a capital gains tax and all this what it does is it yields to the investors also comes down and there is no investment - there is no attraction for any developer to list. The other thing is also that there is a minimum alternate tax (MAT), which is when you are exchanging shares to - if you are holding special purpose vehicle (SPV) where you are holding all the assets which will be 10-15-20 billion, which are rent producing and when you exchange those shares for REITs units, there is a MAT, which has been put on it. So that is another tax. So all these different taxes at different levels make it unattractive for anybody to do the structure.
Ekta: Currently out of MAT, DDI and capital gains deferrals -- which one is the most important one that you will want to hear on to solve the problem of REITs?
A: Capital gains definitely is an important one and the dividend distribution at the SPV level. These two and like I said, I have only mentioned 3-4, there were many other smaller ones which I don't want to go into, the details but these would be the top two which will make a difference. The fact is that the government has announced REITs. I am sure they wanted to come into - it is not only for theory, they want REITs structure to come in. The advantages of REITs are obvious. In today's market, this is going to bring in some liquidity which is required because there is a liquidity problem. What is not understood is besides bringing in liquidity, making the market more transparent, efficient, this will also encourage more investors to come into India especially from outside because REITs provides an exit. So to institutions or institutional assets so for example, if a private equity player or investor from outside comes in and invests in development in India, he knows there is a REITs structure, he can exit after two-three years, five years, seven years whenever he wants to, which itself attracts capital because if you are investing in the US or any other mature market, the foreign investor knows and even that he has other institutions will buy its assets which is literally absent in India right now. Besides foreign investors, even domestic institutional investors would be encouraged to invest in real estate because they know there are these REITs structure which are run professionally, they are listed, there is more transparency and they have the funds which will buy investments that other institutions have made.
Anuj: Any specific real estate company that will benefit out of the tax clarity on REITs?
A: I wouldn't like to take any names but there are many developers and now other institutions who are sitting on income yielding assets so anybody who is sitting on especially the office developments and in India because in other countries there are other segments but primarily offices which are rented out so they own that asset. So in India a lot of times, people just presale so they don't have ownership of fully developed office buildings which are rented out. So any institution, any developer who has got a portfolio of office buildings, which he owns, which are fully occupied or tenanted will benefit from this.
Ekta: Do you expect the REIT kind of structure to be introduced for other sectors like infrastructure, power, renewable?
A: Absolutely, this is not only REITs, there is also Infrastructure Investment Trusts (InvITs), which the government has announced and that would also require similar tax exemptions. I think it is a fantastic tool like I mentioned not only it brings liquidity but the big difference is for infrastructure ore real estate, it will move to institutions owning assets like it has done in mature markets. Like I mentioned that brings in transparency, encourages more investors, retail investors can participate. As you know in India the saving rates are quite high, the participation in the capital markets or in the stock markets, in the public markets, although it is expanded, it is still not there where it should be and when you create structures like this, one end we talk about strategy liquidity, on the other hand we have so much sitting in banks, in low yielding financial instruments and hopefully with these structures that money would go not only into real estate but also into infrastructure projects. Infrastructure is the number one, prime need of our country. If we have to move to the next level, we cannot and everybody knows we cannot move without infrastructure. So therefore an infrastructure needs money, need funding. Therefore it becomes more important that we encourage and these structures be it REITs or InvITs which will really help the infrastructure sector.
Anuj: What is your gut feeling, do you think any clarity will come on REITs in this Budget or again do you think the market will be disappointed?
A: It is very difficult to give a number, I hope if it is a high number for announcement being made in the Budget but my gut feel is that in case Budget doesn't cover it fully, in net few month time we will get clarification and the simple reason is -- we have said that the government has announced it. For me they have not announced it for a fun of it, they want these structures to come in. there has been interacting the industry taking suggestions so I am quite hopeful even if this is not covered in the Budget fully or partially, it will come in next few months time because without this, REITs structure will not come in and if they don't come then the announcement does not have any purpose.
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