InVITs: Pinning hopes on tax changes in Budget to give big infra push

Private equity players and several infrastructure-focussed foreign funds are hopeful that Finance Minister Nirmala Sitharaman will roll out several measures, including taxation changes, in the Budget to make Infrastructure investment Trusts (InVITs) more attractive.

While the government had, in the last few years, taken some measures to develop the InVIT market in India, more changes are needed especially on the taxation front if this instrument is going to become a key financing vehicle for the country’s ₹111-lakh crore National Infrastructure Pipeline project lined up for the next five years, they said.

“The government should open the tap for domestic pension and insurance companies for playing larger role in InvITs. The ability of these institutions to participate in InvITs is currently curtailed,” Siddarth Pai, Co Chair, IVCA Regulatory Affairs Committee and Founding Partner, 3one4 Capital, told BusinessLine .

InvITs are investment instruments that work like mutual funds and are regulated by SEBI. Typically, such a vehicle is designed to pool money from several investors to be invested in income generating assets. InVITs are mostly structured as trusts and assets are held by an independent trustee on behalf of unit holders.

Tax deduction

Bhairav Dalal, Partner & Real Estate Tax Leader, PwC India, said certain tax changes are needed, including removal of tax deduction at source obligation on payouts made by Special Purpose Vehicles to an InVIT. This will help in reducing cash traps, he said adding that there was a need for continuation of tax losses at SPV level on migration to an InvIT.

For long-term capital gain computation, the holding period of unlisted InVIT must be made to 24 months as in the case of unlisted companies. Currently, the holding period for all InVITs is 36 months.

Industry official pointed out that trusts get to pay long-term capital gains tax only if they exit after three years. However, Mutual Funds investors get to pay a long-term capital gains tax if they exit after a year.

Pai said the Budget should also rationalise the withholding taxes that apply to InvITs. Also, the tax rates that applies for exits from InvITs, need to be rationalised to a larger extent to incentivise this asset class, he said.

Given the long duration of the InvIT asset class and cash flow generation taking long period of time, as opposed to MFs and AIF, sufficient incentives need to be built in for the long term, he said.

“The most important thing that government needs to do to improve attractiveness of InvITs as an asset class is to ease the procedures and process for spin off of assets to InvITs itself. This will benefit real estate companies and infrastructure companies who are listed and want to monetise some of the assets they already have in their books,” said Pai.

Just as how the government rationalised the distinction between listed and unlisted InvITS in the last Budget, the underlying cashflows need similar treatment due to the tax arbitrage between interest and dividends. InvITs as an asset class should be treated differently from other asset classes like AIFs or a mutual fund or hedge fund, he said.

In the recent years, several InvIT structures have come about, including IRB, Larsen & Toubro, Reliance. Also, PSU players such as NTPC and Powergrid are making rapid strides on this front. Incidentally, NHAI’s Infrastructure Investment Trust, which is set for a private listing, has approached SEBI for requisite approval. At present, InVITs in the highways sector that are listed include IndInfravit Trust (of L&T Infrastructure Development Projects Limited) and IRB Invit Fund.

“This financial product is best suited for annuity type returns over a very long term, which international pension fund dollars are keen on. The reduction of minimum Rs. 10 lakh investment to Rs. 1 lakh will lead to increased risk of mis-selling and subsequent dissatisfaction of retail investors. Unlisted Invits are even better for global investors, who carry out much diligence before investing and don’t want a mark-to-market daily valuation. Invits are for assets, not projects. Dollars for Invits will replace Rupees for construction projects, which could then be recycled for more construction financing,” said Shailesh Pathak, CEO, L&T Infrastructure Development Projects Limited (IDPL), adding that L&T IDPL’s privately placed Indinfravit Trust in May 2018 with three marquee global investors laid the road for launch of several new Invits.

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