The provisions also provide for a claw back provision to tax income which has been exempt in the earlier years. The provision triggers in the year of breach of any of the conditions relevant to exemption claimed in earlier years. The Central Board of Direct Tax is also authorized to issue guidelines in relation to the interpretation and implementation of the above provision. These guidelines need to be approved by the central government and laid before both Houses of the Parliament. They shall be binding on the tax authority as well as the specified person.
While on one hand the above exemption seeks to attract long-term institutional investors, on the other, budget announced in February 2020 sought to remove the exemption from income tax on dividends in the hands of unit holders of business trusts. This includes Infrastructure Investment Trusts/Real Estate Investment Trusts (InvITs/REITs) which could have led to the long-term investors potentially moving away from investing in the business trusts, which is at a nascent stage in India. Globally, such vehicles and their investors are subject to a single layer of taxation based on the rationale that the tax in the structure should be equal to the tax, had the asset was owned directly by the investor rather than through the structure.
The introduction of a blanket tax on dividends declared by a business trust at the unit-holder level, created two levels of taxation which could have jeopardized any fund raise through an InvIT/REIT by infrastructure and real estate companies. Simultaneously, it would have sent a negative signal to global and local investors, creating a perception of an uncertain policy regime in India – having introduced a dividend exemption and then removing it. The objective of a business trust, unlike a company, is to ensure that annuity income is distributed to investors and 90% of its net distributable cash surplus is distributed to its unit holders. To enable this, a tax exemption on dividends was accorded to the business trust, subject to conditions.
Keeping the above perspective in mind and in deference to the representations made by several stakeholders, the amended the Finance Bill, 2020 during final enactment has provided that as long as special purpose vehicle (SPV) from which dividend income is received by REIT/InvITs by way of distribution has not opted to be governed by lower rate of corporate tax of 22%, unit holders of REITs/InvITs will not be required to pay tax on dividend income distributed by the said REIT/InvIT. Besides this, there shall be no withholding obligation on distribution of such dividend income to their unit holders.
However, if the SPV opts for the lower corporate tax rate of 22% then dividends paid by the SPV would be taxable in the hands of the unit holders of the REITs/ InvITs. Accordingly, issuers of REITs/ InvITs would need to plan for alternate scenarios while finalizing their plans.
In conclusion, the government’s move to provide Sovereign Wealth Fund and Pension Fund income tax exemption for specified infrastructure investments along with dividend exemption for unit holders of InvITs/REITs, signaled its intent to welcome long-term patient investors to invest in sectors which have significant backward and forward linkages with the economy. This may help in boosting the country’s Gross Domestic Product and in generating employment opportunities.
