India Budget 2014: Clarity over tax liability for REITs

Will make it easier for small investors to own commercial real estate in small unit sizes

After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.

Image: Representational Image. Harsha Vadlamani for Forbes India

For real estate and infrastructure developers the Union Budget brought in much needed clarity: Real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs) will now be allowed to pass on tax liability to investors.

Coming fairly early in finance minister Arun Jaitley’s speech—“I intend to provide necessary incentives for REITs, which will have pass through for the purpose of taxation”—the announcement took care of a long-standing demand from the sector.

With this, the industry believes India can finally see the setting up of REITs. “REITs being awarded a pass through status will attract significant investments in the sector,” said Shishir Baijal, chairman and managing director at Knight Frank India, in a press release. The passing through of the tax liability to investors is significant as it removes double taxation for REITs and allows investors to plan their taxes. For instance, capital gains from REITs could be offset against capital losses elsewhere.

Real estate consultants have, in the past, said there is healthy demand for grade A office space in India, which is often in short supply. Converting such property into an REIT would allow small investors to own commercial real estate, albeit in small unit sizes. For larger investors there is the steady rental yield, which in large cities runs as high as 10 percent for commercial property (much lower for residential property) as well as an appreciation in the property price.

With InvITs, the logic is similar. These assets are usually the preferred choice of pension funds and retirement funds for their stable annuity income as well as an appreciation in the cost of the asset. Bridges and ports are usually much sought after.

Be prepared to buy space in iconic office buildings across India in the years to come.

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  • Hemen Parekh

    CREATE SELF - EMPLOYMENT Dear Shri Jaitleyji : I know that the Central Budget is already under printing and it is too late for you to make any changes at this stage But , nothing stops you from making \" STRATEGY \" announcements in your budget speech , such as : \" This government will adopt a strategy of generating Self Employment , to provide meaningful work - and respectable income , to more than ONE MILLION jobseekers every month To 50 MILLION jobseekers in the next 50 months By getting banks to advance , small , low-interest loans to those 125 million poor persons , who have opened bank accounts under Jan Dhan Yojana And , by abolishing Personal Income Tax altogether , for such Self Employed persons , for all deposits made into these accounts for next 5 years \" ( Unintended side effect : Within one year , these 125 million persons would rise above the Poverty Line ! ) Reason is obvious : It needs a fraction of the CAPITAL ( fixed working capital ) to create a Self Employed job as compared to creating a job in Organized Sector ( Public or Private ) As you drive to the Parliament House on 28th morning , you will get to see on the road - or in those shops lining the road - , a lot of Self Employed persons . What kind of CAPITAL ( in tools / machinery / Office - Factory space ) would be needed create each of those \" Jobs \" ? Here are my guesses for investment and space requirement : ( What for ? / Office -Factory - home Space required ) : * Domestic Servants / Maids / Cooks........................ Rs ... NIL ( Nothing / Nil ) * Unskilled Workers............................................... Rs ... 5,000 ( Simple Tools / Construction Site / Road-side ) * Milk Vendors / Delivery Boys.................. Rs... 5,000 ( Bycycle / operate from home ) * Pan-Bidi Gulla Owners.......................................... Rs.... 5,000 ( Stock in Dukaan / 25 Sq Ft footpath ) * Roadside Vegetable Vendors.................................. Rs... 2,000 ( Daily purchase 25 sq ft of footpath ) * Carpenters / Electricians / Plumbers etc................... Rs ..... 2,000 ( Tools of trade / Operate from home ) * Tailors / Watch Repairers...................................... Rs ......5,000 ( Sewing Machine - Tools / Home or 100 sq ft of footpath ) * Hairdressers........................................................ Rs...... 10,000 ( Tools / 100 Sq ft of shop rental ) * Rickshaw Drivers...................................................Rs...... 50,000 ( Rickshaw / Operate from footpath ) I am sure your Ministry has better figures for 200 similar \" Self Employed \" categories . Or you may want to ask NCAER / NITI Ayog / HRD Ministry etc Now , how much CAPITAL will be required to create one \" EMPLOYED \" job ? Once again , here are my guesses : * In MSME businesses / companies......................... . Rs ... 2 Lakh * In large Organized Sector companies...................... Rs... 25 - 100 Lakhs Do you see the logic ? For ONE job in large / organized sector , you can create 5,000 Self - Employed jobs ! One more thing : How long does it take to create such jobs ? > In large organized companies..................................... 3 / 4 years > In MSME companies................................................. 1 / 2 years > Self Employed jobs ( Skilling / Training Period )........... 3 / 6 months Self Employment is the ONLY answer to avoid the fate of PIGS ( Portugal / Italy / Greece / Spain ) and a host of other , \" Advanced Economies \" - which borrowed BILLIONS of dollars from IMF / World Bank / Others ! And now cannot pay back those loans ! Dear Shri Jaitleyji : We have neither time , nor the money to create ONE MILLION jobs every month in the organized sector And we have promises to keep ! I will be keenly listening to your Budget speech with regards , hemen parekh / Mumbai / 22 Feb , 2015

    on Feb 23, 2015
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