Chartered Accountant Finance: [aaykarbhavan] Budget 2014 - A New Special Purpose Vehicle for financing PPP and Infrastructure Projects

Budget 2014 - A New Special Purpose Vehicle for financing PPP and Infrastructure Projects

CA. DINDAYAL DHANDARIA

Proposed amendments:

The Finance Bill, 2014 proposes to inserts a new clause (23FC) in section 10 of the Income Tax Act, 1961 which would provide that:

• Any income of a business trust by way of interest received or receivable from a special purpose vehicle shall be exempt from tax.

• For the purposes of this clause, the expression "special purpose vehicle" would mean an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration;

The aforesaid Bill proposes to insert another clause (23FD) in the above-stated section to provide that any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in clause (23FC), shall be exempt from tax.

The said Finance Bill would also insert Chapter XII-FA titled as "Special Provisions Relating to Business Trusts". The proposed new Section 115UA would provide for tax on income of unit holder and business trust as follows:

"115UA. (1) Notwithstanding anything contained in any other provisions of this Act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.

(2) Subject to the provisions of section 111A and section 112, the total income of a business trust shall be charged to tax at the maximum marginal rate.

(3) If in any previous year, the distributed income or any part thereof, received by a unit holder from the business trust is of the nature as referred to in clause (23FC) of section 10, then, such distributed income or part thereof shall be deemed to be income of such unit holder and shall be charged to tax as income of the previous year.

(4) Any person responsible for making payment of the income distributed on behalf of a business trust to a unit holder shall furnish a statement to the unit holder and the prescribed authority, within such time and in such form and manner as may be prescribed, giving the details of the nature of the income paid during the previous year and such other details as may be prescribed.".

The above-stated amendments are proposed to be applicable from April 1, 2015.

Object of the new provision:

In his budget speech, the Finance Minister said that Real Estate Investment Trusts (REITS) have been successfully used as instruments for pooling of investment in several countries and he intended to provide necessary incentives for REITs which will have 'pass through' for the purpose of taxation. So, as an innovation, a modified REITS type structure for infrastructure projects was announced as Infrastructure Investment Trusts (InvITs), which would have a similar tax efficient pass through status, for PPP and other infrastructure projects. He further said that these structures would attract long term finance from foreign and domestic sources including the NRIs and reduce the pressure on the banking system.

The expansion of asset delivery through the public-private partnership (PPP) model has increased the number of assets available for financing. The Indian infrastructure and the PPPs are currently in a challenging phase, with development of existing projects delayed, and diminishing attractiveness of new projects to private sector funds and strategic operators. In order to meet these challenges, new investment vehicle structure, an Infrastructure Investment Trust needs to be facilitated.

Similarly, securitization of income earning real estate assets needs to be facilitated. Certainty in the taxation aspects of these trusts is necessary.

The Securities and Exchange Board of India (SEBI) had proposed draft regulations relating to two new categories of investment vehicles namely, the Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (Invit). These regulations were placed in public domain for comments. The final Regulations are yet to be notified.

Distinctive elements of the proposed business trusts

The income-investment model of such REITs and Invits (referred to as business trusts) would have the following distinctive elements:

(i) the trust would raise capital by way of issue of units (to be listed on a recognised stock exchange) and can also raise debts directly both from resident as well as non-resident investors;

(ii) the income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor.

Main features of the proposed taxation regime

(i) The listed units of a business trust, when traded on a recognised stock exchange, would attract same levy of securities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long term capital gains, would be exempt and short term capital gains would be taxable at the rate of 15%.

(ii) In case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal. Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of shares shall also be included in the holding period of such units.

(iii) The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV. However, withholding tax at the rate of 5 per cent.in case of payment of interest component of income distributed to non-resident unit holders, at the rate of 10 per cent in respect of payment of interest component of distributed income to a resident unit holder shall be effected by the trust.

(iv) In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 per cent tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194LC of the Act.

(v) The dividend received by the trust shall be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt.

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Chartered Accountant Finance

Thursday, July 10, 2014

[aaykarbhavan] Budget 2014 - A New Special Purpose Vehicle for financing PPP and Infrastructure Projects

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