Tax on short-term capital gain at special rate of 15% applicable to units of business trust also [Section 111A] [W.e.f. A.Y. 2015-16]
The Securities and Exchange Board of India (SEBI) had proposed draft regulations relating to two new categories of investment vehicles namely, the Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (Invite). These regulations were placed in public domain for comments. Based on the comments received on the consultative paper and the Budget announcement, a separate regulatory framework under draft SEBI (Infrastructure Investment Trusts) Regulations, 2014 (referred to as "Regulations" hereafter) has been proposed for introducing Invites in India
The income-investment model of such REITs and Invits (referred to as business trusts) has the following distinctive elements:
(i) the trust would raise capital by way of issue of units (to be listed on a recognised stock exchange) and can also raise debts directly both from resident as well as nonresident investors;
(ii) the income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor.
The expansion of asset delivery through the public-private partnership (PPP) model has increased the number of assets available for financing. The Indian infrastructure and the PPPs are currently in a challenging phase, with development of existing projects delayed, and diminishing attractiveness of new projects to private sector funds and strategic operators. In order to meet these challenges, new investment vehicle structure, an Infrastructure Investment Trust needs to be facilitated. Similarly, securitization of income earning real estate assets needs to be facilitated. Certainty in the taxation aspects of these trusts is necessary.
The Finance (No. 2) Act, 2014 has amended the Act to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. Such regime has the following main features:
1. Meaning of business trust [Section 2(13A)] [W.e.f. 01-10-2014]
"Business trust" means a trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust, the units of which are required to be listed on a recognised stock exchange, in accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and notified by the Central Government in this behalf.
2. Special provisions relating to business trust
Tax on income of unit holder and business trust [Section 11 SUA]
(1) Notwithstanding anything contained in any other provisions of this Act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.
(2) Subject to the provisions of section 111A and section 112, the total income of a business trust shall be charged to tax at the maximum marginal rate. In other words, the income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. Any other income of the trust shall be taxable at the maximum marginal rate.
(3) If in any previous year, the distributed income or any part thereof, received by a unit holder from the business trust is of the nature as referred to in section 10(23FC)(i.e. interest income), then, such distributed income or part thereof shall be deemed to be income of such unit holder and shall be charged to tax as income of the previous year. See point 3(d) below.
(4) Any person responsible for making payment of the income distributed on behalf a of business trust to a unit holder shall furnish a statement to the unit holder and the prescribed authority, within such time and in such form and manner as may be prescribed, giving the details of the nature of the income paid during the previous year and such other details as may be prescribed.
(5) The business trust is required to furnish its return of income.
(6) The necessary forms to be filed and other reporting requirements to be met by the trust shall be prescribed to implement the above scheme.
3. Taxability of units of a business trust [W.e.f. A.Y. 2015-16]
The listed units of a business trust, when traded on a recognised stock exchange, would attract securities transaction tax (STT), and hence would be given the tax benefits as under:
(a) Long-term capital gain from transfer of units of a business trust also to be exempt u/s 10(38)
Like units of equity oriented fund, long-term capital from the transfer of units of a business trust shall also be exempt u/s 10(38). However, there will be long-term capital gain from the transfer of units of a business trusts only when these are held by the investor for more than 36 months instead of 12 months in case of units of equity oriented fund. Provided that the provisions section 10(38) shall not apply in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in section 47(xvii). See para (c) below.
(b) Short-term capital gain from the transfer of units of a business trust shall also be taxable at the special rate of 15% u/s 111A
Section 111A has been amended to provide that like shares and units of equity oriented fund, units of a business trust shall also be taxable at the special rate of 15% as STT will be chargeable on the transfer of such units. However, for the purpose of short-term capital gain, the period of holding in this case shall be 36 months instead of 12 months.
Provided that the provisions section 111A shall not apply in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in section 47(xvii). See para (c) below.
(c) Exchange of shares in special purpose vehicle (SPV) with units of the business trust shall not be regarded as transfer [Section 47(xvii)]:
The Act has inserted section 47(xvii) to provide that any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor shall not be regarded as transfer. Explanation.—For the purposes of this clause, the expression "special purpose vehicle" shall have the meaning assigned to it in the Explanation to section 10(23FC). See para
(d) below. Thus, in case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, as mentioned para in (a) and (b) above, the benefit of section 10(38) and section 111A will not be available to the sponsor in respect of these units at the time of disposal.
Consequential amendments due to insertion of section 47(xvii)
1. Cost of acquisition of units in the hands of the sponsor. As per section 49(2AC) inserted by the Finance (No. 2) Act, 2014, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor.
2. Period of holding of the unit in the hands of the sponsor. The Act has inserted clause (hc) in Explanation 1 to section 42A to provide that in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer of share or shares as referred to in section 47(xvii), there shall be included the period for which the share or shares were held by the assessee i.e. sponsor.
(d) Interest received by the business trust from SPV to be exempt but taxable in the hands of the unit holder [Section 10(23FC) and section 194LBA]
The Act has inserted 10(23FC) to provide that any income of a business trust by way of interest received or receivable from a special purpose vehicle shall be exempt.
Explanation.—For the purposes of this clause, the expression "special purpose vehicle" means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust Is granted registration.
Thus, the income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust. Similarly, there will not be any withholding tax at the level of SPV as clause (xi) has been inserted in section 194A(3) to provide that no tax shall be deductible from any income by way of interest referred to in section 10(23FC).
However, such distributed income or part thereof shall be deemed to be income of unit holder and shall be charged to tax as income of the previous year.
For this purpose, withholding tax in respect of payment of interest component of distributed income to a resident or non-resident unit holder shall be effected by the trust. Consequently, section 194LBA has been inserted w.e.f. 01-10-2014 to provide as under:
(e) Benefit of section 194LC also applicable in case of business trust
The Act has amended section 194LC to provide that in case of external commercial borrowings by the business trust, the benefit of reduced rate of 5% tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in the section.
(f) SPV liable to pay DDT on dividend distributed by it to the business trust but the same if distributed shall be exempt in the hands of the unit holder
The dividend received by the business trust shall be subject to dividend distribution tax at the level of SPV. Hence it is not taxable in the hands of the business trust. Further section 10(23FD) has been inserted to provide as under: Any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in section 10(23FC) shall be exempt. BACK