FPIs seek clarity on taxation on interest from REITs | Economic Times

Mumbai: Foreign portfolio investors have sought clarity from the government on the taxation of interest income from their investments in real estate investment trusts and infrastructure investment trusts.After the definition of securities was changed in the budget, the investors are apprehensive that interest income from investments in REITs and InvITs would attract up to 20% tax.With the government allowing FPIs entry into India’s debt finance sector, many FPIs are upbeat about investing in REITs and InvITs, where they hope to earn relatively secure interest income.However, the budget also changed the definition of securities. For FPIs, income from securities is taxed at 20%. This would mean that interest earned from REITs or InvITs would be taxed at 20% instead of 5%.“It seems that the intention might not have been to increase tax on interest earned by FPIs on REITs and InVITs from 5% to 20%. Rather, the inclusion of units in the definition of securities must have been made with the object of boosting debt investments by FPIs in REITs and InVITs, as announced in the budget,” said Rajesh H Gandhi, a partner at Deloitte India. 81767188According to a presentation made by FPIs to the government, they want to invest in REITs and InvITs but the huge tax burden could potentially diminish their returns.Until now, units of business trusts were not included in the definition of securities. Interest income from business trust units to an FPI was taxable at 5% and withholding tax on such income was prescribed at 5%, according to the presentation made to the government.The FPIs said that following the changes in the regulations, interest income from REIT and InvITs would be taxed as dividend, royalty and technical fees under section 115A(1)(i)(A) of the Income Tax Act.Tax experts said that since there is no consequent amendment proposed to carve out taxability of interest income arising to an FPI from units and other instruments issued by a business trust, an FPI would be subject to 20% tax on such interest income instead of the current rate of 5%.“FPI funding in REITs and InVITs is very significant and so it is crucial that the concessional rate of 5% on interest is restored. FPIs would be expecting that this anomaly should be clarified by way of an amendment in law,” said Gandhi.The government is trying to attract foreign capital to debt financing in India. The proposal to push REITs and InvITs has had a lukewarm response so far due to several regulatory hurdles.