When Budget 2020 shifted the onus of taxation from DDT to the investors, one of the big worry was for the REITs. As per the new rules, investors in REITs and INVITs will also have to pay tax on dividends at their peak rates, making it a virtual non-starter.
REITs are just too young
REITs are equivalent to realty mutual funds that invest in a portfolio of realty assets and pass on benefits to the investors. Currently, Indian REITs can only invest in commercial properties. However, it did offer a good source of diversifying investment risk since it was a portfolio of diverse properties and also it did not move in tandem with equities and bonds. That was the key.
What about Mindspace IPO?
While REITs were permitted and the necessary legislation enacted in 2014, the first REIT IPO of Embassy REIT only happened in March 2019. The Embassy REIT has done extremely well to give 30% returns in the last one year. However, the Budget 2020 announced the scrapping of DDT, just as Mindspace was planning to launch the second REITs IPO in India. While Mindspace has not put off the IPO plans, it has decided to go slow on the roadshows and that could be a clear indication that the timing of the IPO could be put off till there is total clarity on the dividend tax front as it could change the economics.
Dividend tax riddle
One of the reasons the REITs were attractive was the special tax benefits available to them. Being pass-through instruments, the REITs were not liable to DDT, nor were they subjected to tax in the hands of investors. However, the Budget 2020 abolished the DDT on dividends and shifted the onus on the investors. This created a piquant situation for the REITs as they would automatically become subject to tax at the extant rates. That means for a high net worth investor subjected to tax at the rate of 42.7%, the dividends from REITs would be taxed at the relevant rates. This could actually make REITs unattractive to investors and nip a nascent product in the bud.
Time for FM to clarify
Tax exemption on dividends came in to avoid the cascading effect of taxes. While the tax on dividends on direct equities is still understandable, the FM must clarify and remove the dividend tax on pass-through instruments explicitly. That includes dividend tax on mutual funds, REITs and INVITs. In such cases, it is a clear instance of dual taxation due to the cascading effect of taxes. While mutual funds have attained some level of maturity in India, REITs and INVITs are still too young to be stifled by the cascading effect of taxes. The FM would do well to explicitly exempt these products from taxes right away! ©