The Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 originally required Infrastructure Investment Trusts (“InvITs”) to mandatorily list their units on recognized stock exchanges. However, as the InvIT industry failed to achieve the desired traction, and owing to the demands of stakeholders, the regulations were amended in 2019, to allow private placement of InvIT units. Leading Credit Rating Agency, CRISIL reported in August 2019 that InvITs issuances are projected to grow two-fold to over INR 2 Lakh Crore in two years The Budget proposed amendments to taxation norms for infrastructure investments, with an aim to boost investment into the cash-strapped sector.
1. Pass-through tax treatment of unlisted InvITs
Section 115UA of the Income Tax Act, 1961 (“ITA”) provides for Tax on income of unit holder and business trust. It provides firstly, that the trust’s total income, excluding the capital gains income, is charged at the maximum marginal rate. Secondly, it provides that income received by the trust from a Special Purpose Vehicle (“SPV”) is accorded a ‘pass-through’ treatment. It implies that income distributed by the business trust is taxable directly in the hands of investors in the same nature and not in the hands of the business trust.[1]
The catch is that the extant Section 2(13A) of the ITA which defines “business trust” does so by including merely trusts registered as InvIT or Real Estate Investment Trusts (“REIT”) under their relevant SEBI Regulations, which is applicable to units listed on recognized stock exchanges. Accordingly, the benefit of pass-through treatment can only be availed by listed InvITs and REITs.
There was a demand from stakeholders citing realistic hitches such as the applicability of maximal marginal rate to the total income of the trust, if it includes business income, making unlisted InvITs less viable for tax reasons.[2] There was a need to streamline tax treatment of unlisted InvITs at par with those that are listed.
Accordingly, the Finance Bill 2020 proposed an amendment to the definition of “business trust” as discussed above in Section 2(13A) of the ITA. By virtue of this amendment, it would eliminate the requirement of units of business trusts to be listed. Resultantly, unlisted InvITs would be eligible for pass-through treatment under Section 115UA of the ITA. This is expected to give a boost to investment in unlisted InvITs.
2. Tax Exemptions to infrastructure investments made by Sovereign Wealth Funds (“SWF”)
The Finance Bill, 2020 provides for a complete tax exemption from Long Term Capital Gains, Dividend and Interest on infrastructure investments made before March 31, 2024, with a lock-in period of three years. This would be subject to such SWG being wholly-owned and controlled (directly/ indirectly) by the Government of a foreign country and regulated under the laws of the said country. Further, no private person must benefit off of such SWF. It must also not undertake any commercial activity (within/ outside India).
These exemptions are expected to help draw sovereign investors for upcoming infrastructure projects. However many large institutional investors active in India presently will not qualify as ‘specified person’ under Section 10(23FE) of the ITA. Accordingly, it will leave certain major players feeling left out.[3]