Markets

Govt’s tax move to hit inflows via InvITs, say analysts

Venkatesh Ganesh Mumbai | Updated on March 09, 2020

‘These changes would only apply brakes on a fledgling asset class’

The appetite for InvITs, an increasingly preferred investment vehicle could be hit by the Government’s recent tax move to tax unit holders.

In the Budget, Finance Minister Nirmala Sitharaman brought in a revision in the dividend distribution tax rules. What this means is that instead of the InvIT company, an individual who invests in this instrument, has to pay tax on dividend income, which could be 30 per cent upwards.

Earlier business trusts in India had a single level of tax at source, or the corporate tax paid by the special purpose vehicles (SPVs) that owned the assets.

InvITs and REITs are new investment instruments and are required to distribute minimum 90 per cent of the cash flows to investors unlike companies which retain option to re-deploy capital in business than paying dividends. These instruments are alternative ways in which capital intensive sectors can fund their projects. “It has come as a surprise to InvITs and REITs which are dependent on dividend as the majority form of distribution,” said Harsh Shah, CEO, IndiGrid.

“This move by the Government can play spoilsport,” said Shubham Jain, Senior V-P, ICRA. A representation has been made by InvIT companies to the Centre seeking a roll back.

At a time when the Government is looking at multiple financing options to meet its infrastructure goals, industry watchers opine that these changes would only apply brakes on a fledgling asset class. InvIT is an attractive vehicle for project developers to unlock capital deployed in operational projects and helps in reducing the cost of debt for infrastructure projects.

Long-term returns

Foreign investors find InvITs attractive due to their stable long-term returns, relatively lower risks because of operational portfolio and improved corporate governance, according to R Venkataraman, MD, Alvarez & Marsal India.

India’s bond markets are not deep and the country requires largescale fund inflows, stated Laurel Ostfield, Director General, Communications, Asian Infrastructure Investment Bank.

“It is a complex financial instrument and requires some level of understanding. On top of that, this instrument has been around for around for four years, which is not a long time when compared to other options,” stated Shah.

Ratings agency ICRA estimates that ₹2-lakh crore is likely to be raised through InvIT route over the next five years. In 2020, this number is expected to hit ₹80,000 crore. This includes planned InvITs of public sector companies such as Power Grid and NHAI, in addition to private sector companies such as Reliance Jio.

ICRA estimates that domestic unit holders are likely to witness 34 per cent drop in returns while foreign investors would witness around 22 per cent decline.

Exemptions

To be fair, the Centre has exempted sovereign funds from tax exemption and has withdrawn DDT. “However for InvITs to succeed, a conducive regime is the key and much would depend on this,” said Jain.

So far, InvITs have raised ₹22,000 from investors which include the likes of L&T IDPL, IRB Infra, Sterlite (IndiGrid), amongst others. The investors include sovereign wealth funds such as CPPIB, GIC and large financial asset management companies like KKR, Brookfield and Allianz.

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Published on March 09, 2020
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