Union Budget 2021 Expectations: Business Trusts are Cash-Pooling Vehicles (CPVs) that aggregate the funds from investors to fund the big infrastructure or genuine estate projects. A enterprise trust can be either registered as Real-Estate Investment Trust (‘REIT’) to invest in the genuine estate properties, malls, offices and so on. or Infrastructure Investment Trust (InVIT) to invest in infrastructural projects such as bridges, roads and so on.
A certain taxation mechanism for enterprise trust was introduced by the Finance Act, 2014. A enterprise trust (REIT or InVIT) is governed by Section 115UA, Section 10(23FC), Section 10(23FCA) and Section 10(23FD) of the Income-tax Act. A enterprise trust is structured as a hybrid pass-via entity, wherein it is permitted to pass particular earnings to its unit-holders. Consequently, the incomes which are passed to the unit-holders are exempt at the level of enterprise trust and taxable in the hands of unit-holders.
Nature of earnings received by the unit-holders would be the exact same as it was in the hands of the enterprise trust. For instance, if the total earnings received from the enterprise trust incorporates interest earnings, it would be taxable as interest in the hands of the unit-holders beneath the head of other sources.
The incomes which a enterprise trust is permitted to pass via to its unit-holders are as follows:
- Dividend received from unique goal automobile (SPV)
- Interest received from SPV and
- Rental earnings from genuine estate properties straight owned by REITs.
The pass-via status is supplied to the enterprise trust only in respect of the aforesaid incomes and all other incomes are chargeable to tax in the hands of the enterprise trust. Such other earnings is taxable beneath Section 115UA at a maximum marginal price (i.e. 42.744%) except the capital gains covered beneath Section 111A and Section 112.
Section 111A gives for taxability in case of quick term capital gains arising from the transfer of listed shares, equity-oriented mutual funds or units of enterprise trust, and Section 112 prescribes the price in case of lengthy term capital gains arising from the transfer of any lengthy-term capital asset.
The tax prices applicable in case of enterprise trust can be summarized in the following table:
The Finance Act, 2018, inserted a new Section 112A in the Income-tax Act to tax the earnings arising from the transfer of a lengthy term capital asset, getting a listed equity share or a unit of an equity oriented fund or a unit of a enterprise trust at the price of 10% on the quantity of capital acquire in excess of Rs. one hundred,000. Before the introduction of Section 112A, lengthy term capital gains arising from the transfer of such specified securities had been exempt beneath section 10(38).
Section 115UA gives for the tax prices on earnings arising to a enterprise trust. It specifies that any earnings other than earnings taxable beneath sections 111A or 112 will be taxed at a maximum marginal price. It does not provide any reference to earnings taxable beneath section 112A.
After the introduction of section 112A, the consequential amendment really should have been created beneath Section 115UA as properly. Since earlier lengthy term capital gains arising from such specified securities had been exempt and therefore there was no mention of such incomes beneath Section 115UA. However, right after the introduction of section 112A, on a plain reading of section 115UA, it can be interpreted that earnings assessable beneath section 112A would be taxed at MMR which does not look logical. Since Sections 111A, 112 and 112A work on the exact same line, if the exception to tax earnings assessable beneath sections 111A or 112 is supplied to tax them at unique tax prices then, such exception really should also be extended to Section 112A.
Thus, it is suggested that the capital gains covered beneath Section 112A really should be charged to tax at the price of 10% and not at MMR in the hands of enterprise trust to bring parity in the provisions.
(By CA Dipen Mittal, Senior Consultant, Taxmann, with CA Shivi Mittal, Assistant Manager, Taxmann)