TAXATION OF BUSINESS TRUST IN INDIA

TAXABILITY OF BUSINESS TRUST IN INDIA

1. What do you mean by Business Trust?

A business trust is defined under Section 2(13A) of the Income Tax Act, 1961 as a trust registered as (amended by Finance Act, 2020):

• An infrastructure investment trust (InvIT) under the Securities and Exchange Board of India (Infrastructure investment trust) Regulations, 2014 made under the Securities and Exchange of India Act,1992 (15 of 1992); or
• A Real Estate Investment Trust (REIT) under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange of India Act,1992 (15 of 1992).

2. What do you mean by Real Estate Investment Trust (REIT’s)?

Real Estate Investment Trust (REIT) is a trust that owns and manages income generating developed properties and offers its unit to public investors. REIT’s own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels etc.

3. What do you mean by Infrastructure Investment Trust?

Infrastructure Investment Trust (InvIT) make direct investment in infrastructure facilities which are yielding e.g. Toll Road, Railways, Inland waterways, Airport, Urban public transport. InvIT will allow infrastructure developers to monetize specific assets, helping them use proceeds for completing projects of their stalled for want of funds.

Structure of InvIT is quite similar to REITs. The main difference is InvIT make investment into infrastructure facilities whereas REITs make investments in commercial real estate properties.

4. Taxability in hands of Business Trust?

The taxability in hands of business Trust is as follows:

• Interest & Dividend from Special Purpose Vehicle (SPV) shall be Fully exempt u/s 10(23FC), so SPV is not required to deduct TDS on such interest & dividend.
• Rental income of REIT (only REIT) from renting/ leasing/ letting out any Real estate asset owned by REIT shall be exempt u/s 10(23FCA).
• All other income of the Business Trust are Taxable.
• Long term capital gain (LTCG) u/s 112 is taxable @ 20%.
• Short term capital gain (STCG) u/s 111A is taxable @ 20%.
• Any other income of Business Trust shall be taxable @ maximum marginal rate (MMR) i.e. 42.744%.  

5. Taxability in hands of Unit Holders?

1. Any interest received by unit holders from Business Trust (which was received from SPV) shall be taxable in hands of unit holders at following rates:

2. Any dividend received by unit holder from Business Trust (which was received from SPV & SPV taxes u/s 115BAA @ 22%) shall be taxable in the hands of unit holders at the following rates:

3. If SPV paid taxes as per normal provisions of income tax (Not opted 115BAA) then Dividend from SPV will be exempt in hands of Business Trust u/s 10(23FC) & in hands of unit holder’s u/s 10(23FD).
4. Rental income received by Unit holder from REIT shall be taxable at the following rates in the hands of unit holders as it was exempt in hands of business trust u/s 10(23FCA).

5. Any other income (exempt covered in above points) received by a Unit Holder from Business Trust shall be exempt in the hands of the Unit Holder u/s 10(23FD).
6. Taxability on Transfer of unit of business trust:

7. If any person transfers shares of SPV to Business Trust in exchange of Unit of Business Trust, it shall not be treated as transfer & capital gain shall not apply. (Section 47(xvii)). Period of Holding will be Period of shares in SPV plus Period of units in Business Trust.Cost of acquisition will be Cost of acquisition of shares of SPV.

6. Section 56(2)(xii) with amendments?

Specified sum received by unit holder from Business Trust during the P.Y shall be taxable.

Specified sum = A-B-C (which shall be deemed to be “0” if sum of B and C is greater than A), where –

A= aggregate of sum distributed by the Business Trust, which is, -

1. Not in the nature of Interest, dividend & Rental income referred in 10(23FC)/23(FCA); &
2. Not chargeable in hands of Business Trust to tax u/s 115UA(2);

B= amount at which such unit was issued by the business trust; and

C= amount charged to tax under this clause in any earlier P.Y.

Reasons for the amendment:

In some circumstances, Business Trust make distribution to unitholders which can be categorized into 4 different categories – (i) Interest (ii) Dividend (iii) rental income and (iv) repayment of debt. As explained above, interest, dividend and rental income have been exempted at the level of Business Trust and are taxable in the hands of Unit Holders.

However, in respect of the distribution made by Business Trust to Unit Holders (which is shown as repayment of debt) nothing is taxable in the hands of Business Trust or Unit Holders. To remove such dual non-taxation of any distribution made by the Business Trust to Unit Holders (i.e. which is exempt in the hands of the Business Trust as well as Unit holders).

FEW IMPORTANT POINTS.

1. Business Trust is compulsory required to file return as per Section 139(4E) of the Income Tax Act.
2. Special Purpose Vehicle (SPV) means an Indian Company in which Business Trust holds controlling interest & any specific % of shareholding (Presently 50% or more).
3. Income distributed by Business Trust to its Unit Holders shall be of the same nature & in the same proportion in hands of Unit Holders as it has been received by Business Trust.