Artist's impression of the BlueRidge Phase II of Ascendas India Trust. (Photo: Ascendas India Trust)Artist's impression of the BlueRidge Phase II of Ascendas India Trust. (Photo: Ascendas India Trust)

Singapore-based real estate investment advocacy body Asia Pacific Real Estate Association (APREA) has described India’s latest budget as a step closer to giving REITs market acceptance despite being burdened by inefficient tax rules.

“Investors will welcome the Modi Government’s decision to tax REIT income in the hands of beneficiaries,” said Peter Verwer, APREA’s chief executive in media release dated 3 March.

However, Verwer highlighted several problems with the proposed tax treatment of REITs.“While the budget has sensibly aligned the capital gains tax treatment of REIT IPOs and corporate IPOs, it continues to apply a Minimum Alternate Tax (MAT) on the notional capital gain that can occur when setting up a REIT”, said Verwer

APREA also noted that it is common practice for REITs to hold assets via special purpose vehicles (SPVs). It says that REITs which employ this rational practice are penalised whenever income is distributed from SPVs back to a parent fund.

“APREA argues that internal transfers of income should not trigger Dividend Distribution Tax (DDT),” Verwer said.“It makes sense to exempt REITs from DDT, which unfairly reduces investor returns.”

Verwer opines that unless tax efficiency issues are addressed, it will be difficult to kick start a dynamic REIT market in India,” despite tremendous interest from investors and sponsors in the country. “Unfortunately, despite some positive budget announcements it remains very difficult to join the economic dots on a REIT structure that will deliver attractive returns”, said Verwer.

“The Government of India wants to tap into the economic and social benefits offered by REITs.Consequently, APREA calls on the government to continue to work with industry to develop a world class REIT model that will help deliver these dividends”, he added.

Currently investors rely on listed real estate securities such as Ascendas India Trust to get into the Indian market.
Currently investors rely on listed real estate securities such as Ascendas India Trust to get into the Indian market.

By Ridzwan Rahmat

Ridzwan has been analysing REITs and business trusts since 2008, and personally manages a portfolio comprising mainly of SGX-listed REITs. He founded REITsWeek in 2013.