Seminar On Union Budget REIT, InvIT and FDI issues

Transcription

1 Seminar On Union Budget 2014 REIT, InvIT and FDI issues Chamber of Tax Consultants Delhi Chapter and IFA India northern region chapter July 19, 2014 Sunil Jain J. Sagar Associates advocates & solicitors Delhi Gurgaon Mumbai Bangalore Hyderabad

2 Contents FDI in Insurance sector FDI in Defence manufacturing sector FDI in construction/development and low-cost housing REIT and InvIT basic regulatory features Common tax regime REIT and InvIT Issues hanging even after a beneficial tax regime Ponderables problems for developers and solutions 2

3 Insurance sector 3

4 INSURANCE SECTOR adequate capital, protection and jobs Finance Minister s speech and beyond Sector is investment starved and several segments need an expansion Composite cap (FDI+FPI) to be increased up to 49% (existing 26%) with prior approval of FIPB Management and control to be in the hands of Indian partner Benefits of insurance, penetration and density to be enhanced Banking correspondents, micro-offices of public sector insurance to be used to improve marketing Pending bill to be passed Insurance laws (amendment) Bill 2008 amending Insurance Act 1938 among others Amendments to Section 2 (7A) of Insurance Act 1938 defining Indian insurance company 49% 4

5 Defence Manufacturing Sector 5

6 DEFENCE SECTOR domestication, manufacturing and jobs Finance Minister s speech and beyond India is the largest buyer of defence equipment in the world Domestic manufacturing capacities are not evolved Companies controlled by foreign governments and foreign private sector are supplying involving considerable outflow of foreign exchange. Composite cap of foreign exchange to be increased up to 49% (existing 26%) with prior approval of FIPB Management and control to be in the hands of Indian partner Allocation for defence in the current year is INR 2,29,000 Crores Cabinet Committee on Security approves cases where access to modern and state-of-art technology is augmented 6

7 Construction/housing Sector 7

8 Construction and housing- smart cities, affordable housing Finance Minister s speech and beyond General construction Built-up area 20,000 sq meters (earlier 50,0000 sq mtrs) Minimum capital USD 5 million (earlier USD 10 million) 3-years post-completion lock-in Further relaxation for low cost/affordable housing projects Reduced built-up area and minimum capitalisation mentioned above not to apply in case of eligible low cost affordable housing projects Eligibility projects committing 30% of the total project cost for low cost affordable housing can go below 20,0000 sq mtrs and USD 5 m 3-years post-completion lock-in will continue to apply These relaxations should help development of 100 smart cities as satellite towns to large and mid-size cities budget INR 7060 crores 8

9 REIT and InvIT- basics 9

10 Investment trust real estate and infrastructure Constituents of REIT and InvIT Real Estate or Infrastructure asset under a special purpose vehicle (SPV) Developer/Promoter/Sponsor Investment vehicle set up as an investment trust Trustee- SEBI registered entity Manager Investor- resident and non-resident 10

11 Real estate investment trust (REIT) - basics Draft SEBI (REIT) Regulations, dated October 10,2013 Reasons for establishment of REIT Capital is an important aspects of real estate projects and is scarce Capital is tapped in completed, additional mode of exit and avenue for investors Basic concept - REIT Real estate investment trusts to be set-up under Indian Trusts Act 1882 SEBI will grant registration subject to eligibility criteria REIT will raise funds through initial offers and through follow-on offers Atleast 90% of the value or REIT assets in completed revenue generating projects and 10% elsewhere At least 90% of net distributable income after tax to be distributed Direct or SPV level investment. All of INR 1000 crore in one project 11

12 Real estate investment trust (REIT) - basics Draft SEBI (REIT) Regulations, dated October 10,2013 Listing of units will be mandatory REIT should have minimum asset size of INR 1000 crore Initial offer size should be a minimum of INR 250 crore Minimum public float should be 25% of the value of REIT Sponsor Sponsor should have a minimum net worth of INR 20 crores and 5 years exp. Sponsor to hold at least 25% of the total units of the REIT prior to initial offer Lock-in of 3 years on minimum holding & 1 year on holding in excess of 25% Sponsor to hold 15% of the outstanding units at all times Holding can go below 15% after lock-in of 3 years Sponsor to arrange re-designated sponsor & obtain approval of the unit-holder 12

13 Real estate investment trust (REIT) - basics Draft SEBI (REIT) Regulations, dated October 10,2013 Manager Manager should have minimum net-worth of INR 5 crore and 5 years of specified relevant experience Manager should have 2 key personnel in investment committee with 5 years experience Investors Both resident and non-resident investors tare permitted Non-resident investors to invest in terms of FEMA/FDI policy High net worth individuals and institutions are prime targets Minimum size of the unit will be INR 1 lakh Minimum subscription size will be INR 2 lakh 13

14 InvIT basics 14

15 Investment Infrastructure investment trust (InvIT) - basics Draft SEBI (InvIT) Regulations, dated July 17,2014 Basic concept - InvIT Infrastructure includes transport energy water sanitation, communication and social and commercial infrastructure InvIT to invest directly in assets or through shares of SPV. PPP projects essentially through PPP only A trust will need to be settled and will seek registration with SEBI registration SEBI will grant registration subject to eligibility criteria Listing of InvIT will be mandatory Proposed holding of InvIT in the underlying assets shall not be les than INR 500 crores and initial offer size should not be less than INR 250 crores Concept of strategic investor, minimum investment of INR 1 crore 15

16 Tax regime for Business trust REIT and InvIT 16

17 Tax regime Common to both REIT and InvIT Models - players and their tax implications A. REIT/InvIT acquire assets from the project SPV as business/undertaking B. REIT/InvIT acquire the shares of the project SPV B.1 Tax regime for the project SPV No change Payment of corporate tax on profits at 34% Or payment of MAT in case of book profit issues/ tax holiday u/s 80-IA at % dividends distribution tax at 20% Service tax on input 12.36% Interest payments to REIT/InvIT will not be subject to tax withholding 17

18 Tax regime Common to both REIT and InvIT Various tax and legal issues to look at 2. Sponsor / developer exiting the project SPV Shareholding in project SPV to be exchanged for units in REIT/invIT Deferral of capital gains tax on exchange of shares for units to the time of sale of units After lock-in under SEBI R, long-term cap gains tax at 22.66% and shortterm at 34% Holding period for long-term gains more than 36 months Computation justice- available for cost of acquisition of shares and holding period but STT based regime is not available even if the units are listed Payment of STT (if sold at the exchange) + tax as above Versus No long-term cap gains nil on shares sold under IPO 0.2%) OR No long-term capital gains on listed shares 0.1%) 18

19 Tax regime Common to both REIT and InvIT Various tax and legal issues to look at 3. Business trust REIT or InvIT Pass through treatment i.e. taxation in the hands of investors ONLY for interest income from SPV Interest payment from SPV without any tax/tax withholding Dividends received from SPV no tax at the trust level or unit- holders Taxable income Capital gains on sale of shares long-term 22.66% and short-term slab rates (34%) Other income lease rentals, management fee, business income at 34% Trust to provide statement of distribution to unit-holder & department Tax withholding on interest to investors u/s 194LBA & on ECB u/s 194LC Annual Income-tax return to be filed 19

20 Tax regime Common to both REIT and InvIT Various tax and legal issues to look at 4. Investors Exempt income Dividends from SPV through the trust Capital gains of the trust distributed to the unit-holders Income taxed in the hands of the trust at MMR Long-term cap gains on sale of units after 36 months Taxable income Resident investors Short-term capital gains (sale within 36 months) at 15% Interest from trust at 10% for resident and 5% for non-resident Tax will be withheld under section 194LBA Implications under section 206AA if no PAN Non-resident investors DTAA benefit? Short-term capital gains may be exempt Interest income at 5% u/s 115A is already beneficial Tax will be withheld under section 194LBA and 194LC tax credit for income tax paid by trust at MMR Return filing obligations applies to all investors 20

21 Tax regime Common to both REIT and InvIT Various tax and legal issues to look at 5. Trustees and 6. Manager 7.Valuer. 8. Auditor 9.??? Exempt income - None Taxable income Trusteeship services fee taxable at trustee level Managerial fee paid to manager Tax withholding under section 194J on such fees Service tax subject to negative list and any exemption Tax deductible expenditure payment of fees at the REIT/InvIT level? Return filing obligations applies to all taxpayers, generally!!! 21

22 ISSUES those that will need to be addressed Impending tax and legal issues to look at Pass through in relation to specific interest income, else MMR at 34% Tax regime focus on acquisition of SPVs what about asset acquisition Investment in LLP under SEBI regulations and conversion of LLP into company under section 47 Can general trust taxation principles under section 160/161/166 for a determinate trust apply for all non-pass through income MAT on capital gains deferral/exemption at the time of exchange Subscription to units of REIT and InvIT and ECB under FEMA and FDI Policy Classification and tax credit to foreign investors on income taxed at trust level Stamp duty in relation to share sale and asset sale? Operation and management and concession agreements for projects Accommodation and debt replacement of existing Bank and other lenders 22

23 PONDERABLES to be deliberated Problems and solutions What is the problem today? What does the developer do? asset sale/share sale? What is the driving factor for the investor? Whether target rate of return matches with post-tax yields? 23

24 THANK YOU 24