Finance Bill 2023: Massive Relief Proposed For Investors Of REITs, InvITs
The government proposes to soften the tax impact on units holders of REITs, InvITs as envisaged in the Finance Bill, 2023.
Stakeholder pushback has yielded results. The government has decided to soften the tax impact on unit holders of Real Estate Investment Trusts, or REITs, and Infrastructure Investment Trust, or InvITs, as envisaged in the Finance Bill, 2023, last month.
To recap, the bill had proposed that distributions by REITs and InvITs classified as 'repayment of debt' will be taxed in the hands of unitholders effective April 1, 2023. Currently, only distributions in the form of interest, dividends, and rental income are taxed in the hands of the unitholders or investors at the applicable income tax slab.
The proposal saw considerable pushback from industry, with Embassy Office Parks REIT Ltd. saying 40% of its distribution will be impacted.
Now, the government has proposed a change to the Finance Bill, 2023, by providing a formula for calculating the tax implications when distributions are made as 'repayment of debt'. So far, the entire amount classified as 'repayment of debt' has been proposed to be taxed. Now, the proposed change is that only a "specified sum" will be paid, and the amendment to the Finance Bill has provided a formula for that.
Essentially, the government has taken out the cost of acquisition from the amount that will be taxed. And the amount taxed in the previous year will be reduced as well, Ajay Rotti, partner at Dhruva Advisors, told BQ Prime.
As long as you're getting whatever you've invested, you don't pay any tax.Ajay Rotti, Partner, Dhruva Advisors
Here's how the formula will work.
Assume the per-unit issue price when the REIT or InvIT was listed was Rs 200.
In 2024, assume the unit holder received Rs 20 as 'repayment of debt'. There will be no tax implications because the amount is less than the issue price.
Now assume that by 2034, this cumulative distribution has become Rs 210. Only in that year will the Rs 10 become taxable in the hands of the investor.
In the 11th year, let's assume, the amount becomes Rs 230. Then, the amount to be taxed will be Rs 20. [since the investor already paid tax on Rs 10 in the previous year].
The Finance Bill, 2023, is likely to be tabled for discussion in the Lok Sabha on Friday.