Taxation of Business Trust and Unit holders of such business trust

This Article deals with Taxation of Business Trust and Unit holders of such business trust.

There are two types of business trust we will discuss here namely REITs (Real Estate Investment Trust) and InVIT (Infrastructure Investment Trust).

REITs makes direct investments in real estate properties and earns rental income from it. They also invest in companies that invest in real estate properties and ern rentals.

InVITs make a direct investments in the infrastructure facilities which will yield income in any form like toll on roads. These also invest in the companies which are holding infrastructure facility which are earning income.

The business trust invests in these companies and attain equity stake in them. Share holders / promoters sells their shares to these business trust in exchange for units in business trust. The company in which investment is made by business trust is know as SPV special purpose vehicle and the share holders and the promoters are known as sponsors.

These business trust also earns interest income by giving loans to the SPV’s and also other investment areas like FDRs and other assets. The units of business trust are compulsorily listed on the recognized stock exchange of India therefore STT shall be levied on the sale of business trust and also to be said that if any unit holder offers his units for sale in the initial public offer and such units will subsequently listed on the stock exchange.

Whenever the promoters transfers their shares in SPV for units in business trust such transfer is exempt from capital gains. The cost of units shall be taken same as that of shares and the period of holding of shares shall be considered for calculating period of holding of such units.

When the sponsors sells their shares then the provisions of section 111A and 112A shall be applicable even if shares are sold in the initial public offer as explained above.

Business trust earns the following income:

1. Rental income from rented properties
2. Interest on loans given to SPV
3. Dividend from SPV in which business trust have controlling interest
4. LTCG / STCG on sale of properties
5. LTCG / STCG on sale of shares on stock exchanges
6. Interest on FDRs etc.

The income earned by the business trust is distributed by the trust to its unit holders and all such income are taxable in hands of unit holders under the same head of income which would have been considered if such income was not distributed. For example if REIT earns rental income and interest income then business trust distributes such income to the unit holder then in hands of unit holder such dividend on units shall be broken down in to rental income which would be taxable under the head Income under the head PGBP and Interest income which is chargeable to tax under the head Income from other sources (though in this case the interest income is exempt in hands of unit holder due to the reasons explained further in this article). Such division is done by taking the same ratio of income as in hands of business trust.

Applicability of section 115(O):

The dividend distributed buy SPV to business trust:

1. Out of current income arising on or after the date of acquisition of 100% equity shares of SPV by business trust is exempt from DDT;
2. Out of accumulated profits and current profits upto the date of acquisition of 100% equity shares of SPV by business trust is liable to DDT.

Such dividend is exempt in hands of business trust and dividend component distributed to the unit holder is also exempt in their hands.

The following is the tax treatment of dividend in hands of business trust and unit holders:

Note: In hands of unit holders section 115BBDA is not attracted as it is only applicable where dividend is received from an Indian company by a resident since business trust is not a company hence section not apply in this case.

Treatment of interest in hands of business trust and unit holders:

Whenever interest on loan given to SPV is received by SPV it is given a pass through status that means it will be an exempt income in the hands of the business trust and taxability on such interest will arise in hands of unit hoders.  

Pass through status : It means income shall not be taxable in hands of the business trust rather it will be taxed in hands of unit holders when dividend is received by them.

Procedure of determination of income in hands of unit holders:

The dividend received by the unit holders shall be further divided into different incomes which the dividend comprises of. These are incomes earned by the business trust. Such division is based on the ratio of incomes in hands of business trust and that too will be taxed in the same head of income as that of business trust.

Pass through in REIT:

REIT drives incomes from various sources. All incomes except Interest from loan to SPV and Rental incomes from directly held properties shall not be given the pass through status i.e. all the incomes shall be taxable in hands of business trust and shall be exempt in hands of unit holders except the interest and rental income.

Pass through in InVIT:

InVIT drives incomes from various sources. All incomes except Interest from loan to SPV shall not be given the pass through status i.e. all the incomes shall be taxable in hands of business trust and shall be exempt in hands of unit holders except the interest income.