India Budget 2014: Clarity over tax liability for REITs

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.