The Budget 2023-24 has brought distributions made by Real Estate Investment Trust and Infrastructure Investment Trusts in the form of return on capital, taxable in the hands of unitholders.
This component of the distributions made by REITs and InvITs were so far not taxable in the hands of either unitholders or the Trusts as there was no specific section under the Income Tax Act for taxing returns on capital. The Government half allowed them the leeway in order to address the challenges of financing and investment in infrastructure.
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Business trusts usually make their distributions under four categories - interest income, dividends, rental income, and repayment of debt (or return on capital). Interest, dividends, and rental have been accorded pass-through status and are taxable in the hands of unitholders at the applicable marginal tax rates.
The Budget explanatory document noted “in respect of distributions made by the business trust to its unit holders, which are shown as repayment of the debt, it is actually an income of unit holder, which does not suffer taxation in the hands of the business trust or in the hands of unit holder.” In view of this, the Budget has proposed “to make such sum received by the unit holder taxable in his hands.” This will be shown under the head “income from other sources” in the tax returns.
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Industry circles said that it was part of the efforts of the Government to level the field and bring unitholders on par with companies, where dividends are taxed in the hands of shareholders. In the memorandum, the Government explained that dual non-taxation of any distribution made by the business trust, which is exempt both in the hands of the unit holder, as well as the trust, was not the intent of the special taxation regime applicable to such trusts.
Experts pointed out that its four years since the first REIT was listed and InvITs also have a track record, and there was no reason to suppose that the special tax regime would continue for ever.