FICCI suggest taxation of income tax of real estate investment trusts on lines of mutual funds
NEW DELHI, February 5, 2008. Taxation of income of Real Estate Investment Trusts (REITS) on the lines of mutual funds, permission to investment in housing development activities, exemption of capital gains tax on the sale of assets of REITS and VAT ability of stamp duty payable by a REIT are among the 15-point recommendations by FICCI on the Draft (Real Estate Investment Trusts) Regulations issued by the government.
FICCI has suggested that taxation on REITS income should be such that the income gets taxed only once till the stage of its distribution to the end investor. In a Mutual fund if it is dividend, the fund pays the dividend distribution tax and there is no tax in the hands of the investors. A similar tax structure should be worked out for REITs as well. Further, it feels that there should be no Capital Gains Tax on sale of assets of REITS.
A FICCI note has pointed out that among the various classes of real estate, the one which is most needed in India today, is housing. Middle Income Group housing is developed and sold by the developer to individual home owners. This asset class, partly due to the prevailing tenancy laws, is not held by real estate developers for giving out on rent. Section 51 (1) & (2) stipulates that investment should only be in income-generating real estate. This would mean that funds from REITS cannot be employed for residential housing at all. In other words, REITS will only promote commercial buildings and give no assistance whatsoever to promote Housing.
The chamber has therefore recommended that Section 51 be amended so as to allow REITS to invest in housing development activities as well, and not be restricted to income-generating real estate only.
The following are the other recommendations by FICCI:
The stamp duty payable by the REIT should be considered VATable. All assets covered under REIT should pay duty on the incremental sale value.
The cash flows for the REITs up to 90 % needs to be distributed and not the profits made on account of accrued gains.
Dividend by way of bonus issue may be considered.
The concept of non income generating assets needs to be defined since there is a limit of 20% on non income generating assets.
The real estate property covers the purchase and leasehold rights. The rights under the license agreement are not covered. It is suggested to cover the license agreements as well.
If the intention of the legislation is to prevent money from REITS being invested in speculative land holdings, this can be achieved by inserting a stipulation that wherever REITS invest in vacant land, construction must commence within 6 months of receipt of all approvals pursuant to such investment.
Increase in exposure of REITs to single project and all projects of the group as a whole to say 30% and 40% respectively should be allowed.
Clarification is sought on the role of the “credit rating agency” and “appraising agency”. It is suggested to have guidelines for them.
Apart from the recommendations on the draft REITS regulation, FICCI has called upon the Union Finance Minister to do away with the service tax on rental income from commercial property in the ensuing Budget. While rental income needs to be made tax free, FICCI has called for a duty drawback scheme could be introduced for developers on account of creating affordable housing stock. The excise duties paid on raw materials such as cement, steel could be paid back. It has also underlined the need for fixing a timeframe by the Central Government in awarding environmental clearance for real estate projects, and that the project completion certificate be given only after obtaining the environmental clearance certificate.