REITs likely to benefit institutional and foreign investors

A favorable tax regime has been announced on Real Estate Investment Trusts (Reits) which has led realtors to cheer. Big realtors like Parsvanth, DLF and Omax are optimistic about this reform but the analysts doubt that only rich institutional investors will benefit from this. It is difficult for retail investors to benefit due to the market’s receding conditions.

Minimum Alternate Tax (MAT) has been waved off by the Finance Minister Arun Jaitley. FM’s decision has been received with much appreciation as commercial viability of Reits was being hindered by the potential liability of MAT. This will motivate realtors to take significant steps to set up Reit.

MAT exemption has been extended to foreign companies, PE funds, debt funds and venture capitalists, besides Foreign Portfolio Investors (FPIs). The exemption helps them earn interests, fees and royalties. The technical services provided by them are currently taxed below the MAT rate which is 18.5%. MAT exemption is also applicable to capital gains earned by these foreign entities in India.

Mr. Pradeep Jain, Chairman of Parsvnath Developers, said, “Reits will mostly be beneficial to institutional and foreign investors during its initial years and retail investors would be benefitted mostly later. This owes to the fact that Reits offer a pre-tax return of up to 10%.”

There has been an inventory surplus in the real estate sector in metro cities which has led to declined sales. The realtors are facing huge debt burdens and thus the industry as a whole is facing a debt-overhang. The new reforms that have been introduced in Reits can help the developers by providing a new source of capital whereas the investors can also benefit while not actually having to buy properties.

The units in backward areas of Andhra Pradesh, West Bengal, Bihar and Telangana which have been set up after April 1 have also been granted tax breaks by the FM. 20% depreciation has been increased to 35% with respect to the actual cost of new machinery or plant (excluding aircraft and ship). This benefit can be enjoyed by machineries installed and acquired between 1 April, 2015 and 1 April, 2020 (former date included).

The reforms announced by the FM have been welcome steps and have boosted the realty sector. The industry under a slump is getting effective boosts from the FM lending it a better scope in the future.